The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?

This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 42 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is weaker in high-income, high-tax, low-corruption countries that provide public services which make it worthwhile for firms to operate in the official economy despite growing competitive pressure.

How Demand Information Can Destabilize a Cartel

This paper studies a symmetric Bertrand duopoly with imperfect mon- itoring where rms receive noisy public signals about the state of demand. These signals have two opposite eects on the incentive to collude: avoid- ing punishment after a low-demand period increases collusive prots, mak- ing collusion more attractive, but it also softens the threat of punishment, which increases the temptation to undercut the rival. There are cases where the latter eect dominates, and so the collusive equilibrium does not always exist when it does absent demand information. These ndings are related to the Sugar Institute Case studied by Genesove and Mullin (2001).

Vertical Relations in the Presence of Competitive Recycling

We develop a model that incorporates salient features of growth in modern economies. We combine the expanding-variety growth model through horizontal innovations with a hierarchy of basic and applied research. The former extends the knowledge base, while the latter commercializes it. Two-way spillovers reinforce the productivity of research in each sector. We establish the existence of balanced growth paths. Along such paths the stock of ideas and the stock of commercialized blueprints for intermediate goods grow with the same rate. Basic research is a necessary and sufficient condition for economic growth. We show that there can be two different facets of growth in the economy. First, growth may be entirely shaped by investments in basic research if applied research operates at the knowledge frontier. Second, long-run growth may be shaped by both basic and applied research and growth can be further stimulated by research subsidies. We illustrate different types of growth processes by examples and polar cases when only upward or downward spillovers between basic and applied research are present.

The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?

This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 42 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is weaker in high-income, high-tax, low-corruption countries that provide public services which make it worthwhile for firms to operate in the official economy despite growing competitive pressure

Exclusionary Pricing and Rebates When Scale Matters

We consider an incumbent firm and a more efficient entrant, both offering a network good to several asymmetric buyers. The incumbent disposes of an installed base, while the entrant has a network of size zero at the outset, and needs to attract a critical mass of buyers to operate. We analyze different price schemes (uniform pricing, implicit price discrimination - or rebates, explicit price discrimination) and show that the schemes which - for given market structure - induce lower equilibrium prices are also those under which the incumbent is more likely to exclude the rival.

The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?

This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is strongest in low-tax, high-corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure

An Equilibrium Analysis of International Fiscal Transfers as Insurance against Asymmetric Shocks

A static two-country general equilibrium model with uncertainty about labor productivity is developed to analyze potential welfare gains from fiscal cooperation under ex-ante heterogeneity of agents. The fiscal transfer scheme under consideration is a flat uniform labor income tax redistributed as equal lump-sum transfers. Simulations of the bargaining solution show that fiscal cooperation generally reduces output and employment, but can be desingned to provide Pareto improvements on the competitive market equilibrium through interpersonal riskpooling

Lock-In, Vertical Integration, and Intra-group Sales: The Case of Eastern European Firms

A key prediction of transaction cost economics is that the presence of relationship-specific assets increases the likelihood of vertical integration whenever contracts are incomplete. I explore a firm level data set on Eastern European and Central Asian firms, the BEEPS 2005 Survey provided by the EBRD and World Bank, to test this prediction. I measure lock-in by supplier substitution, and vertical integration by the presence of sales to the parent firm, and find the TCE prediction confirmed in the data: At the extensive margin, a firm whose customers are locked-in at medium or high levels is about 5 to 6 percent more likely to be vertically integrated than a firm whose customers are not locked-in. At the intensive margin, I find that high lock-in raises intra-group sales by about 2 percentage points. Being a large firm raises the probability of being vertically integrated significantly in itself, but does not alter the impact of lock-in on the probability of carrying out intra-group sales. Instead, operating in a non-manufacturing industry significantly reduces the probability of vertical integration, and also reduces the impact of high lock-in on the probability of having positive sales with a parent

The Impact of Common Currencies on Financial Markets: A Literature Review and Evidence from the Euro Area

This paper reviews both the theoretical and empirical literature on the impact of common currencies on financial markets and evaluates the first three years of experience with Economic and Monetary Union (EMU). If we assume that multiple currencies prevent national financial markets from integrating, a currency union can improve welfare by (i) encouraging international risk diversion through private portfolio diversification, and (ii) improving growth performance by allowing for riskier, higher-quality, more long-run investment. EMU has encouraged integration among the still fairly fragmented European financial markets both directly and indirectly. When applying the European experience to a potential North American monetary union, one should consider that the U.S. and Canadian financial markets are already more integrated than the European ones, and thus the potential gains in terms of greater financial market integration from a common currency in North America may be more moderate than in Europe

Exclusionary Pricing When Scale Matters

We consider an incumbent firm and a more efficient entrant, both offering a network good to several asymmetric buyers, and both being able to price discriminate. The good has positive value to buyers only if the network size exceeds a certain threshold. The incumbent's installed base guarantees this critical size to the incumbent, while the entrant needs to attract enough new buyers to meet this threshold. We show that price discrimination (in the various forms it may take) reduces the set of achievable socially efficient entry equilibria, and discuss the policy implications of this result