Relative and Absolute Preference for Quality

This paper seeks to explain two related phenomena: (i) it is often the case that when the new variety of a product is launched, some consumers do not purchase the latest variety and (ii) the quality of the latest variety of a product is often not significantly superior compared to the existing variety. We consider a simple model of monopoly with two types of consumers: "regular" (type R) who cares only about the absolute quality of the product and "fastidious" (type F) who cares about the relative quality vis-a-vis the existing variety. We show that it is never optimal for the monopolist to exclusively serve type F. Moreover, we identify situations where although it is optimal for the monopolist to upgrade the quality of the product, this upgrade is not sufficient to meet the standards of type F. As a result, only type R buys the upgraded variety while type F chooses not to buy it.Relative Preference; Absolute Preference; Singular Menu; Separating Menu

Search, Technology Choice, and Unemployment

Technology variations among countries account for a significant part of their income differences. In this paper, a firm\u27s technology choice is embedded in a search theoretic framework for unemployment. More advanced technology is assumed to have a higher setup cost, but it is more productive. The model is tractable and the following results are derived analytically. An increase in the unemployment benefit leads to an increase in the equilibrium wage rate, giving an incentive to firms to choose a more advanced technology. Thus, this result regarding unemployment insurance in models with wage posting carries through with Nash bargaining as well. As a consequence, the equilibrium unemployment rate increases. Furthermore, an increase in the bargaining power of workers increases the unemployment rate but has an ambiguous impact on the equilibrium level of technology and the wage rate. Finally, an increase in the exogenous job separation rate or the interest rate increases the unemployment rate and decreases the wage rate but does not affect the equilibrium level of technology

Public Investment, Government Indebtedness and Transitional Dynamics

This paper considers an endogenous growth model with public capital and government debt. In setting the level of public investment each period, the government is assumed to follow two commonly used in the growth literature fiscal rules: public investment is either equal to a constant fraction of output or equal to a constant share of tax revenues. In our model, we allow revenues to be raised by the government through progressive income taxation and bonds issue. For both fiscal rules, we show that the potential occurrence of either indeterminacy or instability crucially depends on whether the government is a debtor or a creditor. In particular, government indebtedness causes the economy to be prone to either belief-driven aggregate fluctuations or unstable dynamics. This is a novel result in the related literature which has largely overlooked the role of public debt as a possible contributing factor to the presence of indeterminacy and instability in growth models

Relative and Absolute Preference for Quality

This paper seeks to explain two related phenomena: (i) it is often the case that when the new variety of a product is launched, some consumers do not purchase the latest variety and (ii) the quality of the latest variety of a product is often not significantly superior compared to the existing variety. We consider a simple model of monopoly with two types of consumers: "regular" (type R) who cares only about the absolute quality of the product and "fastidious" (type F) who cares about the relative quality vis-a-vis the existing variety. We show that it is never optimal for the monopolist to exclusively serve type F. Moreover, we identify situations where although it is optimal for the monopolist to upgrade the quality of the product, this upgrade is not sufficient to meet the standards of type F. As a result, only type R buys the upgraded variety while type F chooses not to buy it

Search, Technology Choice, and Unemployment

Technology variations among countries account for a significant part of their income differences. In this paper, a firm’s technology choice is embedded in a search theoretic framework for unemployment. A more advanced technology is assumed to have a higher set up cost, but it is more productive. The model is tractable and the following results are derived analytically. An increase in the unemployment benefit leads to an increase in the equilibrium wage rate, giving an incentive to firms to choose a more advanced technology. Thus, this result regarding unemployment insurance in models with wage posting carries through with Nash bargaining as well. As a consequence, the equilibrium unemployment rate increases. Furthermore, an increase in the bargaining power of workers increases the unemployment rate, but has an ambiguous impact on the equilibrium level of technology and the wage rate. Finally, an increase in the exogenous job separation rate or the interest rate increases the unemployment rate and decreases the wage rate but does not affect the equilibrium level of technology

Balanced budget vs. Tax smoothing in a small open economy: A welfare comparison

The objective of this paper is to investigate the effect of lending and borrowing constraints on the dynamics of public debt and optimal taxation policy in the context of a general equilibrium model with tax smoothing. The results from the numerical simulation of the model show significant welfare gains, provided that the policymaker is allowed to borrow and lend in order to smooth taxes across time instead of maintaining a balanced budget at all times. Moreover, for a specific process for asset prices, it is also shown that if the government can issue state-contingent debt then overall welfare can be further improved substantially.Balanced budget Complete markets Incomplete markets Welfare analysis

Search, technology choice, and unemployment

Abstract Technology variations among countries account for a significant part of their income differences. In this paper, a firm's technology choice is embedded in a search theoretic framework for unemployment. More advanced technology is assumed to have a higher setup cost, but it is more productive. The model is tractable and the following results are derived analytically. An increase in the unemployment benefit leads to an increase in the equilibrium wage rate, giving an incentive to firms to choose a more advanced technology. Thus, this result regarding unemployment insurance in models with wage posting carries through with Nash bargaining as well. As a consequence, the equilibrium unemployment rate increases. Furthermore, an increase in the bargaining power of workers increases the unemployment rate but has an ambiguous impact on the equilibrium level of technology and the wage rate. Finally, an increase in the exogenous job separation rate or the interest rate increases the unemployment rate and decreases the wage rate but does not affect the equilibrium level of technology