Do Regional Price Levels Converge?: Paneleconometric Evidence Based on German Districts

We investigate price index convergence on the base of regional data for 439 German districts. Prices refer to the overall consumer price index as well as to the index without housing prices. To increase the efficiency of the testing framework, a panel unit root analysis is performed, where cross section dependencies are taken into account. The tests indicate a lack of regional price convergence. While the idiosyncratic component of price differentials is mostly stationary, their common component is driven by a unit root. The results are very similar for the overall price index and the index without housing prices, and for the Western and Eastern part of the German economy. Obviously the elimination of housing prices is not sufficient to obtain a price index where tradable products dominate. One rationale of our findings is the persistent west-east divide in consumer prices. A second argument is related to the persistence of the price gradient between urban and rural regions.Regional price differentials, price convergence, panel unit roots

A Test Strategy for Spurious Spatial Regression, Spatial Nonstationarity, and Spatial Cointegration

A test strategy consisting of a twofold application of a Lagrange Multiplier test is suggested as a device to reveal spatial nonstationarity and spurious spatial regeression. It is further illustrated how the test strategy can be used as a diagnostic for presence of a spatial cointegrating relationship between two variables. Using Monte Carlo simulations it is shown that the small sample behaviour of the test strategy is as desired in these cases.

Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education

Previous research shows that firms shroud high add-on prices in competitive markets with naive consumers leading to inefficiency. We analyze the effects of regulatory intervention via educating naive consumers on equilibrium prices and welfare. Our model allows firms to shroud, unshroud, or partially unshroud add-on prices. Results show that consumer education may increase welfare; however, it may also decrease welfare if education is insufficient to alter the equilibrium information and pricing strategy of firms. Educating consumers may do more harm than good and should thus only be considered if the regulator is sufficiently well informed about consumer and firm behavior.bounded rationality, competition, regulation, welfare, consumer protection

On the Stability of the German Beveridge Curve. A Spatial Econometric Perspective

In this paper, we use the Beveridge relationship to address the effectiveness of the matching process, that brings workers searching for jobs together with employers searching for workers. For a fixed matching technology, the curve yields a negative relation between the unemployment rate and the rate of vacancies. Movements along a curve reflect adjustments over the business cycle. In a recession vacancies are closed, and workers enter the unemployed. Shifts of the curve are more important here, as they point to structural change. For example, an outward shift of the curve indicates an in-creased mismatch, perhaps due to a deterioration in human capital of the unemployed or changes in the unemployment benefit system, which affects the willingness of the un-employed to fill out vacancies. Empirical estimates rely on panel data. A sample of 180 regional labour markets is em-ployed, and the sample period runs from 1993 to 2004. The regional labour markets are seperated on the base of flows of the job commuters and correspond to travel-to-work areas. Due to common or idiosyncratic shocks, however, the cross sections are not inde-pendent. Instead, they are tied together to some extent, and the spillovers account for spatial effects. As these patterns can have an impact on the correlation between unem-ployment and vacancy rates, the results of OLS regressions are eventually biased. Thus the Beveridge curve is efficiently estimated by a spatial procedure, where regional de-pendencies are taken into account. No previous paper has investigated a similar broad regional dataset so far. The eigenfunction decomposition approach suggested by Griffith (1996, 2000) is used to identify spatial and non-spatial components in regression analysis. As the spatial pat-tern may vary over time, inference is conducted on the base of a spatial seemingly unre-lated regressions (spatial SUR) model. Due to this setup, efficient estimates for the Beveridge relationship are obtained. Time dummies are used to control for shifts in the curve. The empirical results provide some indication that the degree of job mismatch has increased over the recent periods.

Local Control: An Educational Model of Private Enforcement of Public Rules

We study a society of agents where individual incentives conflict with collective ones and thus individual utility maximization leads to inefficient outcomes. We assume that there is no functioning central institution which can control individual behavior. Instead, we analyze a system of what we call local control (LC), where the enforcement of punishment lies in the hands of individuals in the society rather than in the hand of a central institution. The mechanism that governs the spread of control is the educational impact on an agent being controlled by some other agent, where we distinguish between executed and threatened punishment. Agents maximize their payoffs and underlie a constant drift towards not controlling others anymore. Our main results show that LC can survive if the educational impact of control is strong enough relative to the drift. If the educational impact of control is too weak LC breaks down. Moreover, there exists a non{monotonic punishment effect that sets a trap for standard legal policy advices.cooperation;prisoner's dilemma;social control;punishment;institutional change

Thresholds for Employment and Unemployment - a Spatial Analysis of German Regional Labour Markets 1992-2000

Changes in production and employment are closely related over the course of the business cycle. However, as exemplified by the laws of Verdoorn (1949, 1993) and Okun (1962, 1970), thresholds seem to be present in the relationship. Due to capacity reserves of the firms, output growth must exceed certain levels for the creation of new jobs or a fall in the unemployment rate. While Verdoorn's law focuses on the growth rate of output sufficient for an increase in employment, in Okun's law, the fall in the unemployment rate becomes the focus of attention. In order to assess the future development of employment and unemployment, these thresholds have to be taken into account. They serve as important guidelines for policymakers. In contrast to previous studies, we present joint estimates for both the employment and unemployment threshold. Due to demographic patterns and institutional settings on the labour market, the two thresholds can differ, implying that minimum output growth needed for a rise in employment may not be sufficient for a simultaneous drop in the unemployment rate. Second, regional information is considered to a large extent. In particular, the analysis is carried out using a sample of 180 German regional labour markets, see Eckey (2001). Since the cross-sections are separated by the flows of job commuters, they correspond to travel-to-work areas. Labour mobility is high within a market, but low among the entities. As the sectoral decomposition of economic activities varies across the regions, the thresholds are founded on a heterogeneous experience, leading to more reliable estimates.The contribution to the literature is twofold. First, to the best of our knowledge, no previous paper has investigated a similar broad regional dataset for the German economy as a whole before. By using a panel dataset, information on the regional distributions around the regression lines as well as theirs positional changes is provided for each year. Second, the methods applied are of new type. They involve a mixture of pooled and spatial econometric techniques. Dependencies across the regions may result from common or idiosyncratic (region specific) shocks. In particular, the eigenfunction decomposition approach suggested by Griffith (1996, 2000) is used to identify spatial and non-spatial components in regression analysis. As the spatial pattern may vary over time, inference is conducted on the base of a spatial SUR model. Due to this setting, efficient estimates of the thresholds are obtained. With the aid of a geographic information system (GIS) variation of the spatial components can be made transparent. With Verdoorn’s and Okun’s law the figures show some significant patterns become obvious over time. In respect to Verdoorn’s law, for instance, a stripe of high values in the north-western part from Schleswig-Holstein via Lower Saxony and North Rhine Westfalia to Rhineland Palatinate is striking in all years but 1994 and 1995. In most periods the spatial component is likewise concentrated in Saxony. Clusters of low values can be found in northern Bavaria and, in some periods, in Thüringen and Mecklenburg-Vorpommern. Other parts of Germany appear to be more fragmented consisting of relative small clusters of low, medium and high values of the spatial component. With Okun’s law some changing spatial patterns arise. In all, spatially filtering provides valuable insights into the spatial dimensions of the laws of Verdoorn and Okun. Threshold employment and unemployment, regional labour markets, spatial filtering techniques, spatial SUR analysis

Market Access, Regional Price Level and Wage Disparities: The German Case

In this paper we use the NEG framework of the Helpman model to investigate the spatial distribution of wages across German labour market regions under different assumptions. As the assumptions of equal regional price level and equal real wages are strongly rejected for the German economy, standard approaches may fail to reveal the role of market access in explaining regional wage disparities. In part substantial changes occur when market potential is measured with the aid of regional price levels. With the so-called price index approach, the importance of market access in explaining regional wage differentials is clearly revealed. When controlling for heterogeneity of labour force and spatial dependence, the relationship still remains highly significant. From the price index approach, limited demand linkages of reasonable reach are inferred.New Economic Geography, market access, wage disparities, regional price levels

Worker Self-Selection and the Profits from Cooperation

We investigate a competitive labor market with team production. Workers differ in their motivation to exert team effort and types are private information. We show that there can exist a separating equilibrium in which workers self-select into different firms and firms employing cooperative workers make strictly positive profits. Profit differences across firms persist because cooperation strictly increases output and worker separation requires firms employing cooperative workers to pay out weakly lower wages.team work, self-selection

Negative Externalities and Equilibrium Existence in Competitive Markets with Adverse Selection

Rothschild and Stiglitz (1976) show that there need not exist a competitive equilibrium in markets with adverse selection. Building on their framework we demonstrate that externalities between agents − an agent's utility upon accepting a contract depends on the average type attracted by the respective principal − can solve the equilibrium existence problem, even when the size of the externalities is arbitrarily small. Our result highlights the degree of control a principal has over the attractiveness of his contracts as an important feature for equilibrium existence, thereby offering a new perspective on existing theories of competition in markets with adverse selection.asymmetric information, competition, adverse selection, externality

A Myopic Adjustment Process Leading to Best-Reply Matching

stochastic adjustment process;best reply;mathcing;regret equilibrium