A position note on well-being and self-employment

Following the idea that entrance into self-employment is a phenomenon that can be partially captured by the level of ones aspirations and well being, the purpose of this position note is to outline the nexus between well being and entrance into self employment. For that purpose Wagle's (2008) objective setting of multidimensional poverty is utilized in defining the concept. A central argument to be made is that the intention to improve one's well-being through self employment and the option to enter self-employment, in many situations, cannot be completely separated from each other. Accordingly, people seek opportunities to improve aspects of their well-being, rather than business opportunities per se. This will be demonstrated by a conceptual model of entry into self-employment residing on the notion of well-being; where well-being is seen to affect and be affected by entrance into self-employment. The model does not provide a strategic map of how to enter self employment and how to succeed with that. Nor, it aims at giving very strong practical implications. Rather, it guides attention to questions about what in an individual relative level of well-being that affect entrance into self-employment. This is important since the entrepreneurship literature has yet to theorize and examine the triggering effects of well-being on the entire entrepreneurial process.Entrepreneurship; Self-employment; Well-being

Commercial Policy with Altruistic Voters

This paper considers a specific factor model with two sectors in which agents are altruistic towards domestic residents. I show that, even if the degree of altruism is small, direct democracy leads to commercial policies that are biased against trade as long as the mobile factor is unbiased in the sense of Jones and Ruffin (1977) and the income of the owners of the factor which is specific to the import competing sector is lower than the income of the owners of the other specific factor. Tariffs may be preferred to subsidies by the median voter if subsidies require that beneficiaries spend a fixed cost to demonstrate that they are entitled to these subsidies and there is heterogeneity in the size of producers. Lastly, I construct a model of indirect democracy where legislators can receive campaign contributions from potential lobbyists. Even if campaign contributions are positive in equilibrium, the tariffs that emerge from votes taken after lobbying can represent the wishes of the median voter. In this model, campaign contributions do not buy votes. Instead, consistent with what is claimed in the qualitative literature, they buy access to legislators' time. The model is also consistent with the evidence showing that campaign contributions and lobbying activity are directed mainly at legislators who already agree with their contributors and their lobbyists.

Customer Anger at Price Increases, Time Variation in the Frequency of Price Changes and Monetary Policy

While much evidence suggests tha price rigidity is due to a concern with the reaction of customers, price increases do not seem to be typically associated with drastic reduction in purchases. To explain this apparent inconsistency, this paper develops a model where consumers care about the fairness of prices and react negatively only when they become convinced that prices are unfair. This leads to price rigidity, though the implications of the model are not identical to those of existing models of costly price adjustment. In particular, the frequency of price adjustment ought to depend on economy-wide variables observed by consumers. As I show, this has implications for the effects of monetary policy. It can, in particular, explain why inflation does not fall immediately after a monetary tightening.

Fair Pricing

I suppose that consumers see a firm as fair if they cannot reject the hypothesis that the firm is somewhat benevolent towards them. Consumers that can reject this hypothesis become angry, which is costly to the firm. I show that firms that wish to avoid this anger will keep their prices rigid under some circumstances when prices would vary under more standard assumptions. The desire to appear benevolent can also lead firms to practice both third-degree and intertemporal price discrimination. Thus, the observation of temporary sales is consistent with my model of fair prices. The model can also explain why prices seem to be more responsive to changes in factor costs than to changes in demand that have the same effect on marginal cost, why increases in inflation seem to affect mostly the frequency of price adjustment without having sizeable effects on the size of price increases and why firms often announce their intent to increase prices in advance of actually doing so.

Perceptions of Equity and the Distribution of Income

This paper builds a simple model where there is a link between employees' perception of the fairness of employers and the actual distribution of income. Wages are based in part on employers' assessments of the productivity of individual employees. I show that the equilibrium distribution of income depends on the beliefs of employees concerning the accuracy of these evaluations. I give conditions under which the distribution of income across employees of the same vintage is more equal if employees believe that these evaluations are generally inaccurate (so that they are skeptical of capitalists in general) than when they believe that these evaluations are accurate. The model is consistent with the fact that, in a sample of seven countries, the distribution of income is more unequal in countries where people feel that income inequality is not too large.

Imperfect Competition and the Effects of Energy Price Increases on Economic Activity

We show that modifying the standard neoclassical growth model by assuming that competition is imperfect makes it easier to explain the size of the declines in output and real wages that follow increases in the price of oil. Plausibly parameterized models of this type are able to mimic the response of output and real wages in the United States. The responses are particularly consistent with a model of implicit collusion where markups depend positively on the ratio of the expected present value of future profits to the current level of output.

The Relative Rigidity of Monopoly Pricing

This paper seeks to explain why monopolies keep their nominal prices constant for longer periods than do tight oligopolies. We provide two possible explanations. The first is based on the presence of a small fixed cost of changing prices. The second, on small costs of discovering the optimal price. The incentive to change price for duopolists producing differentiated products exceeds that of a single monopolistic firm which produced the same tange of products as the duopoly.

Cyclical Markups: Theories and Evidence

If changes in aggregate demand were an important source of macroeconomic fluctuations, real wages would be countercyclical unless markups of price over marginal cost were themselves countercyclical. We thus examine three theories of markup variation at cyclical frequencies. The first assumes only that the elasticity of demand is a function of the level of output. In the second, firma face a tradeoff between exploiting their existing customers and attracting new customers. Markups then depend also on rates of return and future sales expectations; a high rate of return or expectations of low sales growth lead firms to assign a lower value to future revenues from new customers. Firma thus raise prices and markups. In the third theory, markups are chosen to ensure that no one deviates from an (implicitly) collusive understanding. Increases in rates of return or pessimistic expectations then lead firms to be less concerned with future punishments so that markups fall. Aggregate post-war data from the U.S. are moat consistent with the predictions of the implicit collusion model.