Why are Prices Sticky? Evidence from Business Survey Data

This paper offers new insights on the price setting behaviour of German retail firms using a novel dataset that consists of a large panel of monthly business surveys from 1991-2006. The firm-level data allows matching changes in firms' prices to several other firm-characteristics. Moreover, information on price expectations allow analyzing the determinants of price updating. Using univariate and bivariate ordered probit specifications, empirical menu cost models are estimated relating the probability of price adjustment and price updating, respectively, to both time- and state- dependent variables. First, results suggest an important role for state-dependence; changes in the macroeconomic and institutional environment as well as firm-specific factors are significantly related to the timing of price adjustment. These findings imply that price setting models should endogenize the timing of price adjustment in order to generate realistic predictions concerning the transmission of monetary policy. Second, an analysis of price expectations yields similar results providing evidence in favour of state-dependent sticky plan models. Third, intermediate input cost changes are among the most important determinants of price adjustment suggesting that pricing models should explicitly incorporate price setting at different production stages. However, the results show that adjustment to input cost changes takes time indicating "additional stickiness" at the last stage of processing

Why are Prices Sticky? Evidence from Business Survey Data

This paper offers new insights on the price setting behaviour of German retail firms using a novel dataset that consists of a large panel of monthly business surveys from 1991-2006. The firm-level data allows matching changes in firms' prices to several other firm-characteristics. Moreover, information on price expectations allow analyzing the determinants of price updating. Using univariate and bivariate ordered probit specifications, empirical menu cost models are estimated relating the probability of price adjustment and price updating, respectively, to both time- and state- dependent variables. First, results suggest an important role for state-dependence; changes in the macroeconomic and institutional environment as well as firm-specific factors are significantly related to the timing of price adjustment. These findings imply that price setting models should endogenize the timing of price adjustment in order to generate realistic predictions concerning the transmission of monetary policy. Second, an analysis of price expectations yields similar results providing evidence in favour of state-dependent sticky plan models. Third, intermediate input cost changes are among the most important determinants of price adjustment suggesting that pricing models should explicitly incorporate price setting at different production stages. However, the results show that adjustment to input cost changes takes time indicating "additional stickiness" at the last stage of processing.Price setting behaviour; time dependent pricing; state dependent pricing; sticky prices

Estimating the Value of Groundwater in Irrigation

In recent years there has been increasing regulation of agricultural water use in order to reduce transboundary and environmental water conflicts. Effective policy analysis needs to have tools to estimate correctly the value of irrigation water. Irrigating land increases crop yields and this higher profitability should be capitalized into the sales price of the land. For irrigation that depends on surface water rights, studies have found this to be the case (Xu et al. 1993, Faux and Perry 1999). However, studies that have analyzed the value of groundwater in irrigation have found mixed results. Hartman and Taylor (1989) and Sunderland, Libbin and Torell (1987) find that groundwater irrigation has no significant effect on land prices; Torrell et al. (1990) find a significant positive effect of groundwater in irrigation. One explanation is that in areas where groundwater use is not restricted there is the option to implement irrigation in the future and thus the presence of groundwater irrigation may not have a large effect on the sales price. Consistent with this idea of option value, Petrie and Taylor (2007) look at differences in land values before and after a moratorium on water-use permits and find that permits add value to agricultural land only after the restriction is in place. An additional econometric issue is that the decision to irrigate is not random but is based on the underlying characteristics of the land. Thus hedonic estimates of the value of irrigation rights may be biased. In this paper we analyze the value of groundwater in an area with pumping restrictions using both a standard hedonic model and a propensity score matching model. We use a geospatial database from Chase County, Nebraska that includes arms length sales, tax assessor’s data, hydrologic and climatic variables. We find that per acre values of groundwater irrigation are 15 percent higher using the propensity score method compared to the hedonic model. This result is driven in large part by the preferential adoption of irrigation on intermediate quality land. An important implication for policy is that hedonic estimates of the value of groundwater in irrigation may underestimate the cost, to both farmers and the government, of future water use reductions. Our study area is part of the Republican River Basin in Nebraska. The Basin has been the source of litigation between Colorado, Kansas and Nebraska. In 2002, the Supreme Court decided that groundwater pumping by Nebraska caused reduced instream flows in Kansas. As a result, groundwater management districts in Nebraska were forced to introduce a variety of restrictions: moratoria on new wells (introduced in 1999), metering of existing ones, and volumetric pumping restrictions. The data for this research include all agricultural parcels in Chase County, Nebraska that sold between 2000 and 2008, obtained from the Chase County tax assessor’s website. Each parcel contains sale prices along with the new ownership and sales date. In addition, the presence of outbuildings and the square footage and age of residences are included. Each observation also includes the distribution of agricultural land (irrigated, dryland or grassland) and four soil quality types in each type of land, resulting in a total of twelve soil classes. We also assembled georeferenced data on estimated depth to water, the rate at which a well can pump water, precipitation and growing degree days. After excluding the non arms-length sales transactions, outliers where the sale price per acre was greater than $6,000, and parcels of less than four acres, 330 observations were left. In the first estimation, we use physical, geophysical, sales, and structure data to characterize the sales price. We estimate an Ordinary Least Squares Regression model in which the dependent variable is the sales price per acre regressed on the other variables. Consistent with Petrie and Taylor (2007), our results show that irrigated land sells for a higher price than equivalent dryland or grassland (ceteris paribus). For the period between 2000 and 2008, during which the well drilling moratorium was in place, we find that the price of irrigated land was about$712 per acre greater than that of non irrigated land. Second, we estimate a propensity score model which involves two steps. First, we estimate the probability of a parcel of land being irrigated using a probit model. An interesting result from the probit regression is that farmers are more likely to irrigate on lands that are of intermediate quality (Soil 2 and Soil 3), suggesting that irrigation is a land-quality augmenting technology. This result is similar to Lichtenberg’s (1989) analysis in the region, but unlike that paper our results suggest that irrigation is less likely on the lowest quality land. In the second step we match pairs of non irrigated and irrigated parcels that have the same probability of being irrigated and analyze whether there is a difference in the sales price. Results show that once again there is a positive and significant value associated with groundwater irrigation rights, but the difference is larger than the hedonic analysis at $839. This suggests that if selection into irrigation is not accounted for, the price of the land is undervalued by over 15 percent. These results have important policy implications in areas such as Nebraska where there is debate on how to reduce water use effectively. The results of our paper suggest that future reduction may be costlier than previous research suggests and that the standard hedonic method may not be best in estimating the value of water. Also, the reductions will be more expensive to both the government and farmer. In Nebraska, the government has tried to reduce water use by buying permits from farmers. There has been a lot of resistance to this and one explanation for this may be that the government is not offering enough compensation for the permits.groundwater, hedonics, propensity score matching, Environmental Economics and Policy,

Essays on Policy Evaluation from an Environmental and a Regional Perspective

This dissertation consists of three essays, which explore how public policies influence household and firm behavior, and the impact policies could have on environmental outcomes. The essays examine how households respond to price-based policies, the impact information disclosure policies could have on environmental outcomes, and finally the influence of normative appeals and non-pecuniary strategies on behavioral outcomes. Understanding these adjustments in the behavior of the agents is particularly important for policy design and for legislators who intend maximize societal benefit. The first essay, titled Matchmaking Between Vehicle Miles Traveled and Fuel Economy: the Role of Gasoline Prices, studies a potential effect of gasoline prices that has been over- looked in the literature. Due to heterogeneity in demand for vehicle miles traveled (VMT), when gasoline prices increase, the increased cost of operating an inefficient vehicle are greater for households that drive more. Thus, in equilibrium, after an increase in the gasoline prices there should be a stronger matching from households, based on their VMT, to the fuel economy of the cars they own. Potentially, this matching effect could save 15% of US gasoline consumption, even with no effect on individual VMT and no effect on the vehicle fleet. Using confidential data from the National Highway Transportation Survey, the effect of higher gasoline prices on such assortative matching is estimated using a variety of econometric models. For all the different model specifications, the matching effect is significant and quite robust. This is the first study to analyze this re-allocation or matching effect. The second essay, titled Evaluating the Effectiveness of an Environmental Disclosure Policy: an Application to New South Wales, examines the impact of an environmental information disclosure policy on environmental outcomes. The main purpose of introducing an environmental information disclosure strategy is to reduce informational asymmetries and put pressure on firms to reduce emissions. This paper studies the impact of such a policy on air quality in New South Wales, Australia. A regression discontinuity design is employed and the results show that the pollutant concentration levels were not significantly affected after the implementation of the policy. Empirically, the estimates of the effects under the discontinuity-based Ordinary Lease Squares (OLS) model have the opposite sign for some of the pollutants relative to the estimates from the basic OLS model. Therefore, basing conclusions on the OLS results will engender incorrect inference. Discontinuity-based results are robust to different model specifications. The third essay, titled What Determines Citizen Trust: Evaluating the Impact of Campaigns Highlighting Government Reforms in Pakistan, explores how normative appeals and awareness campaigns could influence societal and political trust. This project is in collaboration with Musharraf Cyan and Michael K. Price. The purpose of this study is two-fold. Firstly, the impacts of exposure to violence and conflict on general levels of trust, measures of life-satisfaction, and attitudes towards formal and informal institutions are examined in the province of Khyber Pakhtunkhwa (KPK), Pakistan. Secondly, the impacts of targeted messages, which were designed to inform the citizens regarding new government reforms (aimed at increasing transparency, protecting and strengthening private property rights, and improving service delivery), on general levels of trust and attitudes towards institutions are studied. For the analysis an in-person survey was designed, which was conducted in randomly selected villages throughout KPK. Empirical results show that exposure to violence has a negative impact on trust and measures of life-satisfaction and has positive effects on formal institutions. The results also suggest that the awareness campaigns affected trust levels and perceptions about the quality of public services positively. Moreover when the eeffects are allowed to differ based on exposure to conflict, important heterogeneity is identified. The results are robust to different model specifications

Competition between exchanges : Euronext versus Xetra

Exchanges in Europe are in a process of consolidation. After the failure of the proposed merger between Deutsche Börse and Euronext, these two groups are likely to become the nuclei for further mergers and co-operation with currently independent exchanges. A decision for one of the groups entails a decision for the respective trading platform. Against that background we evaluate the attractiveness of the two dominant continental European trading systems. Though both are anonymous electronic limit order books, there are important differences in the trading protocols. We use a matched-sample approach to compare execution costs in Euronext Paris and Xetra. We find that both quoted and effective spreads are lower in Xetra. When decomposing the spread we find no systematic differences in the adverse selection component. Realized spreads, on the other hand, are significantly higher in Euronext. Neither differences in the number of liquidity provision agreements nor differences in the minimum tick size or in the degree of domestic competition for order flow explain the different spread levels. We thus conclude that Xetra is the more efficient trading system. JEL Classification: G10, G1

A stochastic user-operator assignment game for microtransit service evaluation: A case study of Kussbus in Luxembourg

This paper proposes a stochastic variant of the stable matching model from Rasulkhani and Chow [1] which allows microtransit operators to evaluate their operation policy and resource allocations. The proposed model takes into account the stochastic nature of users' travel utility perception, resulting in a probabilistic stable operation cost allocation outcome to design ticket price and ridership forecasting. We applied the model for the operation policy evaluation of a microtransit service in Luxembourg and its border area. The methodology for the model parameters estimation and calibration is developed. The results provide useful insights for the operator and the government to improve the ridership of the service.Comment: arXiv admin note: substantial text overlap with arXiv:1912.0198

Identifying the role of labor markets for monetary policy in an estimated DSGE model

We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy. JEL Classification: E32, E52, J64, C11Die Anpassung einer Ökonomie an gesamtwirtschaftliche Schocks hängt nicht zuletzt von der reibungsfreien Funktion des Arbeitsmarktes ab. Dieser ist daher von höchster Wichtigkeit, um den Ablauf konjunktureller Schwankungen zu erklären; siehe etwa Hall (2005) und Shimer (2005), sowie Blanchard und Galí (2005). In Bezug auf die Geldpolitik wurde diese Rolle z. B. von Trigari (2004) unterstrichen. Insbesondere Kontinentaleuropa ist durch hohe und persistente Arbeitslosigkeit sowie durch recht rigide Löhne gekennzeichnet. Vor diesem Hintergrund untersuchen wir, welche Rolle Arbeitsmarktrigiditäten für eine stabilitätsorientierte Geldpolitik spielen. Unser Modell enthält insbesondere zwei für die Erklärung der Daten wichtige Friktionen. Zum einen modellieren wir Reibungsverluste im Arbeitsmarkt dahingehend, dass es für Firmen kostspielig ist, einen neuen Arbeitnehmer zu finden, und dass dieser Prozess durch Friktionen in der Regel einige Zeit in Anspruch nimmt (ein „search and matching'' Modell also in den englischen Termini). Dies sorgt für Arbeitslosigkeit auch im Gleichgewicht. Zum anderen verlagern Lohnrigiditäten in Form zeitversetzter Lohnverhandlungen den Anpassungsprozess auf dem Arbeitsmarkt von Preisen (Löhnen) auf die Beschäftigung. Der Modellrahmen, den wir vorschlagen, weist einen direkten Kanal von Löhnen auf die Grenzkosten der Firmen auf - und damit, über die Neu-Keynesianische Phillipskurve, einen direkten Kanal von Löhnen auf die Inflationsdynamik. Einige Studien haben bereits partiell untersucht, wie sich Arbeitsmarktrigidität auf die Transmission in Neu-Keynesianischen Modellen auswirkt, siehe z. B. Christoffel und Linzert (2005) und Braun (2005). In unserem Papier gehen wir einen Schritt weiter und schätzen die oben angedeutete Modellstruktur im allgemeinen Gleichgewicht mit bayesianischen Methoden wie in Smets und Wouters (2003). Um die Heterogenität in Europa vor der Währungsunion zu umgehen, greifen wir auf deutsche Daten zurück. Die deutsche Volkswirtschaft dient als besonders geeignetes Beispiel, um die Interaktion von rigiden Arbeitsmärkten und Konjunkturzyklus in einem Umfeld stabiler Preise zu untersuchen. Das geschätzte Strukturmodell erlaubt es uns, die Rolle von Arbeitsmarktstruktur und Arbeitsmarktschocks getrennt zu identifizieren - und Schlussfolgerungen für die Geldpolitik daraus zu ziehen. Wir nutzen das geschätzte Modell zuerst, um der Frage auf den Grund zu gehen, wie das Arbeitsmarktregime den monetären Transmissionsprozess beeinflusst. So werden Anpassungsprozesse auf dem Arbeitsmarkt in der Regel prägend dafür sein, wie sich Geldpolitik auf die Inflationsrate auswirkt, etwa durch Zu- und Abflüsse in und aus der Beschäftigung sowie durch den Lohnsetzungsprozess. Das Verhalten der Grenzkosten der Produktion über den Konjunkturzyklus wird z. B. durch den Grad an Lohnrigidität, die Flexibilität, mit der ungenutzte Arbeitsressourcen im Produktionsprozess verfügbar gemacht werden können, und die Höhe der Such- und Einstellungskosten beeinflusst. Die Grenzkosten wiederum bestimmen das Preissetzungsverhalten der Firmen und damit, über die Neu-Keynesianische Phillipskurve, die gesamtwirtschaftliche Inflationsdynamik. Im ersten Teil des Artikels berücksichtigen wir daher unterschiedliche Grade an Nominal- und Reallohnrigidität. Wir untersuchen hier ferner wie sich eine Veränderung der Flexibilität im Such- und Einstellungsprozess auf die monetäre Transmission auswirkt. Die zweite Frage, mit der wir uns beschäftigen, ist die der direkten Rolle von Schocks im Arbeitsmarkt für die Evolution des Konjunkturzyklus. Wir analysieren, wie sich diese Schocks in der Beschäftigung und gesamtwirtschaftlichen Produktion niederschlagen. Ferner untersuchen wir die Auswirkungen dieser auf die Inflationsrate. Der Hintergrund für diese Untersuchung ist, dass Schocks im Arbeitsmarkt eine sehr wertvolle Information für die stabilisierungsorientierte Geldpolitik darstellen würden, sollten sie in der Tat einen starken Effekt auf die gesamtwirtschaftliche Produktion und das Preisniveau haben. Drittens, und letztens, schließen wir eine sorgfältige Untersuchung darüber an, wie sensitiv unsere Studie in Bezug auf die gewählte Modellierung der Lohnrigidität ist. Unsere Ergebnisse lassen sich wie folgt zusammenfassen. Erstens zeigen wir, im Einklang mit der Literatur, dass die Struktur das Arbeitsmarktes zentral für die Anpassungsmechanismen der Ökonomie ist - und damit insbesondere auch für die Inflationsdynamik und folglich die Geldpolitik. Die genaue Ausgestaltung der Arbeitsmarktrahmenbedingungen, wie etwa das Ausmaß an Lohnrigidität oder die Effizienz des Such- und Einstellungsprozesses, hat beachtliche Effekte auf die monetäre Transmission. Im Detail finden wir zum Beispiel, dass das Ausmaß der Lohnrigidität Inflationspersistenz positiv bedingt. Weiterhin zeigen unsere Resultate, dass Schocks jeglichen Ursprungs in einem Umfeld mit starken Such- und Einstellungsfriktionen einen längerwährenden Einfluss auf die Inflationsrate haben. Rigidere Löhne erhöhen zudem deutlich die Fluktuation der Zahl der Beschäftigten; ähnliches findet sich für die Vereinigten Staaten in Shimer (2004) und Hall (2005). Zweitens finden wir, dass Arbeitsmarktschocks per se zwar einen großen Einfluss auf den Arbeitsmarkt (Beschäftigung und Löhne etwa) haben, eine Transmission in andere Teile der Ökonomie aber kaum erfolgt. Das heißt zum Bespiel, dass die Inflationsrate nur marginal von Schocks im Arbeitsmarkt beeinflusst wird. Die Ursachen lassen sich vermutlich auf unsere Modellierung zurückführen. So nehmen wir zur Zeit an, dass sich die Konsumenten untereinander perfekt gegen Konsumschwankungen versichern, die aus Arbeitslosigkeit resultieren würden. Diese Annahme aufzuweichen könnte mehr Transmission vom Arbeitsmarkt in die anderen Sektoren der Ökonomie hervorrufen. Ferner vermuten wir, dass sich mehr Transmission darüber erzeugen ließe, dass der Lohn- und Preissetzungsprozess enger aneinander geknüpft wird. Unsere Resultate scheinen jedoch, drittens, nicht davon abzuhängen, in welcher Art und Weise wir die Lohnrigidität modellieren, wie wir in einer ausführlichen Sensitivitätsanalyse zeigen. Zusammenfassend benötigen Zentralbanken für die Stabilisierungspolitik ein gesundes Verständnis dafür, wie der Arbeitsmarkt strukturiert ist. In dem Maße, in dem die europäische Geldpolitik darauf ausgerichtet ist, Inflation auf einem niedrigen Niveau zu stabilisieren und die gesamtwirtschaftliche Produktion nahe am langfristigen Trend zu halten, scheinen Schocks im Arbeitsmarkt hingegen nicht von äußerster Wichtigkeit zu sein. Das letztere Fazit bedarf weiterer Untersuchung. Obwohl Arbeitsmarktschocks nämlich die tatsächliche Produktion im Aggregat kaum beeinflussen, könnten sie sehr wohl das natürliche Produktionsniveau (unter hypothetisch flexiblen Preisen) und das hypothetische effiziente Produktionsniveau verändern, siehe etwa Blanchard und Galí (2005). Dieses wäre für die Durchführung optimaler Geldpolitik sehr wohl von Bedeutung

De-commoditizing Ethiopian coffees after the establishment of the Ethiopian Commodity Exchange : an empirical investigation of smallholder coffee producers in Ethiopia

The repercussions of reforming an agricultural market are mainly observed at the most vulnerable segment of the value chain, namely, the producers. In the current commodity market created with trade through the Ethiopian Commodity Exchange (ECX), coffee is less traceable to its producers. Only cooperatives that sell certified coffee through the unions they belong to, are allowed to bypass the more commodified ECX market. This study aims to investigate if small-scale coffee producers in southwestern Ethiopia that sell coffee through the certified cooperative are better off. It is assumed that the coffee sales through, and membership of, a cooperative, allows farmers to improve their coffee production as well as to improve other aspects of their livelihood. A sustainable livelihood approach was used as the inspiration for the welfare indicators that needed to be considered, data collected amongst members and non-members of certified cooperatives, and a propensity score model to investigate the impact of cooperative membership on the livelihood indicators. Results suggest that members of certified cooperatives indeed receive, on average, better prices. Yet, no evidence was found that indicates that the higher price is translated into better household income. Furthermore, coffee plantation productivity of those members who were interviewed was lower than that of the non-members. This finding could explain the failure to find an overall effect. Since the majority of the producers' income emanate from coffee, a sustainable way of enhancing the productivity of the coffee could revitalize the welfare of the coffee producers

Equilibrium in a market with intermediation is Walrasian

We show that a profit maximizing monopolistic intermediary may behave approximately like a Walrasian auctioneer setting bid and ask prices nearly equal to Walrasian equilibrium prices. In the model agents trade either through the intermediary or privately. Buyers (sellers) choosing to trade through the intermediary potentially trade immediately at the ask (bid) price, but sacrifice the spread as potential gains. Agents trading privately capture all of the gains to trade, but risk costly delay in finding a partner. We show that when the cost of delay is small, the intermediary sets bid and ask prices nearly equal to Walrasian equilibrium prices. As the cost of delay vanishes, the equilibrium bid and ask prices converge to the Walrasian equilibrium prices. If the possibility of trading through the intermediary is removed, and therefore all trade takes place in the private trading market, then prices are not close to Walrasian equilibrium prices even as the cost of delay vanishes