New Network Goods

New horizontally-differentiated goods involving product-specific network effects are quite prevalent. Consumers market-wide preference for each of these goods typically is initially unknown. Later, as sales data begin to accumulate, agents learn market-wide preferences, which thus become common knowledge. We study such a market, pinpointing the factors which determine whether the market-wide preferred firm reinforces its lead as time elapses, penetration and under-cost pricing prevail, and first- or last-mover effects in market-wide preferences occur.Network effects, horizontal differentiation

The Log of Gravity

Although economists have long been aware of Jensen's inequality, many econometric applications have neglected an important implication of it: the standard practice of interpreting the parameters of log-linearized models estimated by ordinary least squares as elasticities can be highly misleading in the presence of heteroskedasticity. This paper explains why this problem arises and proposes an appropriate estimator. Our criticism to conventional practices and the solution we propose extends to a broad range of economic applications where the equation under study is log-linearized. We develop the argument using one particular illustration, the gravity equation for trade, and apply the proposed technique to provide new estimates of this equation. We find significant differences between estimates obtained with the proposed estimator and those obtained with the traditional method. These discrepancies persist even when the gravity equation takes into account multilateral resistance terms or fixed effectsElasticities, Gravity equation, Heteroskedasticity, Jensens inequality, Poisson regression, Preferential-trade agreements

Has the euro increased trade?

Joao Santos Silva and Silvana Tenreyro investigate whether the new currency has delivered the promised growth in trade between member countries

Do banks price their informational monopoly?

Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks to use the private information they gain through monitoring to "hold-up" borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's credit-worthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, particularly for firms that are revealed to be safe. Our findings show that firms are able to borrow from banks at lower interest rates after they issue for the first time in the public bond market and that the magnitude of these savings is larger for safer firms. We further find that among safe firms, those that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating when they entered the bond market. Since more information is revealed at the time of the bond IPO on the former firms and since this information will increase competition from uninformed banks, these findings provide support for the hypothesis that banks price their informational monopoly. Finally, we find that while entering the public bond market may reduce these informational rents, it is costly to firms because they have to pay higher underwriting costs on their IPO bonds. Moreover, IPO bonds are subject to more underpricing than subsequent bonds when they first trade in the secondary bond market.Corporate bonds ; Credit ratings