spatial competition and the theory of differentiated markets an introduction spatial economics has been both in the very center of microeconomic theory and at its periphery it has been at the center to the extent that it has followed a tradition taking its roots in hotelling s classic stability in competition paper 15 and has used spatial concepts to explain by analogy the pricing of differentiated commodities it has been at the periphery to the extent that it has considered spatial pricing as observed in real life situations and tried to rationalize and evaluate observed spatial pricing techniques the former approach focuses on f o b pricing which is apparently taken for granted the latter focuses on discriminatory pricing which appears as the most frequently used technique in the industrial world the purposes of this special issue are to bring those two approaches together and to explore some of their analytical possibilities and limitations the philosophy of this introductory paper is to show the need for an integration of both avenues in an analysis of differentiated markets we begin by discussing the assumptions of what we will call the hotellinglosch approach and their implications in terms of the problems they allow us to tackle several papers in this issue contribute new insights in this respect we then undertake a similar exercise for what may be called the greenhutohta approach focusing on spatial price discrimination to discover the possibilities it may provide for an analysis of quality choice at the outset we note that its spatial approach typically implies partition of the

proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

one switch utility functions and a measure of risk consider the relative attractiveness to a decision maker of two financial gambles as the wealth of that individual varies it may seem reasonable that either one alternative should be preferred for all wealth levels or that there exists a unique critical wealth level at which the decision maker switches from preferring one alternative to the other decreasing risk aversion is not sufficient for this property to hold we identify the small class of utility functions for which it does we show how the property leads naturally to a measure of risk the results of this paper apply equally well to discounting functions for cash flows one switch discount functions permit at most one change in preference between cash flows as all payoffs are deferred in time

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

the effect of food stamps on labor supply a bivariate selection model abstract although there is a large literature on the effects of u s transfer programs on labor supply this is the first such study of the food stamp program we model the nonlinearity and nonconvexity of the budget constraint and use maximum likelihood methods to estimate hours of work functions for female heads of household the largest recipient group in the program we also model the joint response to afdc and food stamps and we account for the existence of a significant number of eligible households who do not participate in the programs a three equation bivariate selection model is estimated on a sample of eligible households with maximum likelihood

rational escalation of costs by playing a sequence of unfavorable gambles the martingale playing the martingale strategy is an anomaly reverse to that observed in the st petersburg paradox this paper rationalizes the demonstrated irrationality of playing by characterizing necessary and sufficient conditions under which a utility maximizing decision maker would play the strategy an individual willing to play the martingale may not be deterred by a finite cap on wagers individuals will continue with the strategy in the face of mounting consecutive losses which is thus sequentially rational these results give insight into instances of escalating commitment to a losing cause by analyzing one specific instance of such behavior

toward a theoretical model of voluntary overcompliance abstract we explain why some firms voluntarily overcomply with environmental regulation in our model all consumers value environmental quality but differ in their willingness to pay which depends on their income levels publicly available information on environmental performance of firms enables consumers to identify clean firms firms participate in a two stage duopoly game where they first choose their levels of cleaning technology and next engage in price competition the market gets segmented by income levels a minimum standard binding on the dirty firm has the effect of improving the performance of the cleaner firm a subsidy obtains the same competitive outcome

taxation within cournot oligopoly abstract when the production of output causes pollution we often consider taxation as a means to reduce it this paper examines various forms of taxation to control pollution within cournot oligopoly it shows that two commonly used forms can actually increase pollution in contrast both of these forms unambiguously reduce pollution within the competitive model the paper provides conditions in terms of demand and technology that make taxation effective in the cournot oligopoly case another implication of the analysis is that outside the price taking framework asymmetry of cost functions is particularly important and deserves careful attention when we examine the effect of taxation

transfers in cash and in kind theory meets the data we review theoretical explanations for in kind transfers in light of the limited empirical evidence after reviewing the traditional paternalistic arguments we consider explanations based on imperfect information and self targeting we then discuss the large literature on in kind programs as a way of improving the efficiency of the tax system and a range of other possible explanations including the samaritan s dilemma pecuniary effects credit constraints asymmetric information amongst agents and political economy considerations our reading of the evidence suggests that paternalism and interdependent preferences are leading overall explanations for the existence of in kind transfer programs but that some of the other arguments may apply to specific cases political economy considerations must also be part of the story

the estimation of a joint wage hours labor supply model in this paper the standard cross sectional static model of labor supply is modified to make the wage endogenous and a joint wage hours model is estimated the econometric technique addresses the non linearity of the budget constraint by approximating the constraint by a series of discrete points the results show that the budget constraint is indeed nonlinear that hours affect the wage quadratically that true wage elasticities are lower as a result and that the model fits the hours distribution much better than the standard tobit model

repeated optional gambles and risk aversion we analyze in this paper the effect of age on the optimal dynamic strategy toward repeated independent gambles when deciding to accept or to reject a lottery that is offered today the gambler knows how many lotteries can yet be played in the future we first characterize the optimal dynamic strategy when future lotteries are identically distributed we show that the existence of future lotteries always increases the willingness to gamble today when the sequence of lotteries is independent but not identically distributed we show that this does not need to be true this analysis can be applied to the problem of investing in indivisible risky investment projects or to the problem of dynamic optimal insurance demand

prospect theory mental accounting and differences in aggregated and segregated evaluation of lottery portfolios if individuals have to evaluate a sequence of lotteries their judgment is influenced by the presentation mode experimental studies have found significantly higher acceptance rates for a sequence of lotteries if the overall distribution was displayed instead of the set of lotteries itself mental accounting and loss aversion provide an easy and intuitive explanation for this phenomenon in this paper we offer an explanation that incorporates further evaluation concepts of prospect theory our formal analysis of the difference in aggregated and segregated portfolio evaluation demonstrates that the higher attractiveness of the aggregated presentation mode is not a general phenomenon as suggested in the literature but depends on specific parameters of the lotteries the theoretical findings are supported by an experimental study in contrast to the existing evidence and in line with our theoretical results we find for specific types of lotteries an even lower acceptance rate if the overall distribution is displayed

environmental policy in a green market this paper studies the impact of some frequently used environmental policies in a duopolistic market where purchasers are willing to pay more for less polluting goods when consumers differ in their environmental awareness a cleaner and a dirtier variant coexist in equilibrium the higher the average willingness to pay for the good the lower are variants unit emissions but the higher are industrial aggregate effluents a maximum unit emission standard reduces unit emissions of both variants but boosts firms sales and consequently increases industrial aggregate emissions as a result social welfare may be reduced we also explore the effects of technological subsidies and product charges including differentiation of charges

on the taxation of polluting products in a differentiated industry this paper studies the provision of environmental quality in an imperfectly competitive market it uses a vertical differentiation model in which the free entry equilibrium results in an under provision of quality the following main results are obtained first a commodity tax may have a significant impact on the market structure in this setting it tends to increase the number of active firms second through its impact on market structure a commodity tax may be welfare improving even though quality creates a positive externality third a commodity tax may bring about an equilibrium that is arbitrarily close to a pareto efficient allocation

the value of pre decision side bets for utility maximizers if an alternative is attractive only at certain wealth levels of a decision maker typically above some critical level then there will be occasions when it is better to enter into an independent side bet prior to making a decision than to accept or reject the alternative outright

a contextual uncertainty condition for behavior under risk suppose that your choice between uncertain financial prospects is made more difficult by two independent contextual uncertainties concerning the size of your existing wealth one contextual uncertainty has a greater spread than the other if you could resolve one of these contextual uncertainties before making your choice would you rather it be the larger or the smaller in this paper we explore the intuitive notion that it ought to be more advantageous to resolve larger rather than smaller contextual uncertainties the utility function for wealth uw aw be cwa b c 0 is the only utility function that satisfies this condition and that is also increasing and risk averse at all wealth levels

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

an economic model of welfare stigma perhaps the most basic assumption of the economic theory of consumer demand is that more is better than less virtually all of the major propositions of consumer theory can in a certain sense be derived from the assumption that goods are good interestingly however this tenet seems to be violated by the behavior of many individuals in the low income population for many turn out to be eligible for a positive welfare benefit but do not in fact join the welfare rolls for example it has been estimated that in 1970 only about 69 percent of the families eligible for afdc aid to families with dependent children participated in the program see richard michel 1980 the corresponding percentage for afdc u the program for which families with an unemployed male are eligible was only 43 percent and the participation rate in the food stamp program was only 38 percent see maurice mcdonald 1977 this phenomenon has puzzled many investigators because such individuals do not locate on the boundaries of their budget sets consequently most investigators ignore the problem when studying the effects of welfare programs on behavior in this paper this seemingly irrational rejection of an increase in income is modeled as resulting from welfare stigma that is from disutility arising from participation in a welfare program per se 1 the existence of stigma has been amply documented in the sociological literature patrick horan and patricia austin 1974 lee rainwater 1979 where interviews of recipients have often uncovered feelings of lack of self respect and negative self characterizations from participation in welfare nevertheless this phenomenon has not been modeled and many questions consequently remain when is the disutility of participation strong enough to prevent participation shouldn t we expect individuals to weigh the disutility of participation against the potential benefit in their decisions what is the elasticity of participation with respect to the potential benefit also in a slightly different vein how are the work disincentives of welfare affected by stigma these questions have been given scant attention by economists yet they are crucial for our ability to predict the impact of various welfare programs on the lowincome population here these questions are addressed by modeling nonparticipation as a utility maximizing decision the model is developed and estimated for the afdc program 2 the model posits an individual utility function containing not just disposable income but

tax design in the presence of imperfect competition an example abstract this paper studies the effects upon price output and entry in an oligopolistic market induced by tax policy elsewhere in the economy the results derived are applied to a model of copying to find conditions for which subsidisation of the manufacturers of originals is welfare improving the critical factor is found to be the distribution of consumers tastes

noncooperative regulation of a nonlocalized externality with a nonlocalized pollution externality different groups bear the costs and benefits of abatement in the case of acid rain these groups are respectively consumers in the midwest and pollutees in the northeast these groups have conflicting interests that are represented respectively by a public utilities commission and an environmental regulator we analyze a model in which the environmental protection agency acting as a von stackelberg leader regulates pollution and the public utility commission regulates the price for a monopolist that has private information about the effectiveness of its abatement alternatives we characterize a noncooperative equilibrium and compare it with a cooperative equilibrium a nonlocalized pollution externality poses special regulatory problems when the benefits and the costs of abatement are borne by distinct groups whose interests are represented by different regulatory agencies a relevant example is acid rain which is believed to be caused in part by coal fired electricity generating plants these emit sulfur dioxide and nitrogen oxide which upon contact with moisture in the atmosphere form acid that falls with rain measures to reduce these emissions are of concern to the residents of the states in which the coal fired generating plants are located because abatement costs increase the prices they pay for electricity a number of plans have been proposed for distributing those costs more broadly but the costs of reducing the emissions of generating plants located in ohio will likely be borne in large part by ohio consumers and utilities while the benefits from abatement will largely be realized by the residents of the northeast and canada the control of a nonlocalized externality such as acid rain raises the issue of the relationship between the environmental regulator the environmental protection agency epa and the public utility commission the former is responsible for achieving an acceptable balance between the damage from pollution and the cost of abatement the latter is responsible for pricing electricity on the basis of the costs of production and pollution control one possibility is that cooperation between the two regulators leads to the joint regulation of emissions and prices cooperation would internalize the conflicting interests and mandates of the regulators but the distributive consequences of the regulatory alternatives inhibit cooperation the public utility commission for example has an interest in avoiding abate

the food stamp program and food insufficiency food stamp participants have higher food insufficiency rates than eligible nonparticipants even after controlling for other factors given the food stamp program s prominent role in the alleviation of hunger this is a counterintuitive result we conjecture that these higher rates are due to adverse selection insofar as households more likely to be food insufficient are also more likely to receive food stamps we establish a theoretical framework to address this adverse selection using a simultaneous equation model with two probits we show that once one controls for this adverse selection food stamp recipients have the same probability of food insufficiency as nonrecipients copyright 2001 oxford university press

discrete hours labour supply modelling specification estimation and simulation the assumption behind discrete hours labour supply modelling is that utility maximising individuals choose from a relatively small number of hours levels rather than being able to vary hours worked continuously such models are becoming widely used in view of their substantial advantages compared with a continuous hours approach when estimating and their role in tax policy microsimulation this paper provides an introduction to the basic analytics of discrete hours labour supply modelling special attention is given to model specification maximum likelihood estimation and microsimulation of tax reforms the analysis is at each stage illustrated by the use of numerical examples at the end an empirical example of a hypothetical policy change to the social security system is given to illustrate the role of discrete hours microsimulation in the analysis of tax and transfer policy changes

the food stamp participation and labor supply of married couples an empirical analysis of joint decisions this paper examines the effect of the food stamp program on intrafamily labor supply and program participation decisions married couples simultaneously choose the labor supply of the husband and wife and whether to participate in the food stamp program using data from the survey of income and program participation the author estimates a nested multinomial logit model simulations indicate smaller labor supply effects to changes in the food stamp benefit than the previous research which focused on single parents married couple program participation is found to be relatively responsive to changes in food stamp benefits

environmental levies and distortionary taxation pigou taxation and pollution i note an important distinction between the optimal price of environmental quality in a second best world and the optimal level of environmental quality using an analytical general equilibrium model i show that for reasonable parameter values an increase in tax distortions arising from an increase in required tax revenues leads to a fall in the optimal pigouvian tax rate even while environmental quality improves in general knowledge of the direction of changes in optimal environmental tax rates due to changes in the economy is not sufficient for understanding the impact on environmental quality 2003 elsevier science b v all rights reserved

linkages among welfare food assistance programmes and labour supply evidence from the survey of programme dynamics at the centre of the debate on welfare reform is whether incentives based systems help poor families move out of poverty into jobs recent data from the first survey of programme dynamics longitudinal and the 1998 experimental data files allow evaluation of the interaction among the food stamp programme fsp temporary assistance for needy families tanf programme and labour force participation under different programme design and economic conditions a model that incorporates jointly determined programmes participation and work decisions is applied to a sample of working age lower income and asset households participation in tanf increases the probability of fsp participation and decreases the probability of being in the work force working decreases the probability of receiving food stamps work tanf and fsp participation are related and tanf and fsp participation rates among poor households who are potentially eligible for tanf are sensitive to changes in programme parameters as expected labou

snap expansions and participation in government safety net programs this paper investigates the interactions between health and nutritional assistance programs such as medicaid snap wic and school lunch programs exploiting variation in snap eligibility across states and over time i find strong evidence of program interactions when a state moves from the federal rule to the most extensive snap eligibility rule enrollment in free school lunch and wic increases by 4 1 and 7 9 percentage points respectively i estimate that the federal government spends an additional 74 cents on the school lunch program and wic for each dollar spent on snap due to the expansion

valuing food store access policy implications for the food stamp program food stamp recipients may lack access to larger stores reducing the availability of nutritious food reliance on smaller stores may have undesirable impacts policy alternatives include limiting food stamp redemption to larger stores and subsidizing store development i estimate that limiting redemption to supermarkets and grocery stores or supermarkets alone results in losses ranging from 499 2 million to 1 05 billion or 1 17 billion to 2 44 billion respectively annual loss in food stamp recipient welfare nationwide the impact of improving access is also significant ranging from 333 6 million to 931 2 million

symposium on spatial competition and the theory of differentiated markets inclusion of assumptions of the hotelling losch approach spatial price discrimination in the greenhut ohta approach analysis of quality choice spatial approach that typically implies partition of the buyers in sales areas which do not overlap from ebsco

eco labeling and market equilibria with noisy certification tests an intriguing alternative to traditional methods for regulating externalities is the provision of information about firms environmental attributes an increasingly important example of this approach is eco labeling where a third party certifies firms products such schemes are currently used in a variety of countries this paper investigates the equilibria that may occur with eco labeling and the attendant welfare effects i model certification as a noisy test subject to both type i and type ii errors but where green firms more likely to pass than brown firms while it commonly leads to an increase in the fraction of green units in the market the introduction of an eco label can either increase or decrease welfare

changes in background risk and risk taking behaviour economic decision making under uncertainty often takes place in the presence of multiple risks and in markets that are less than complete as a consequence choices about endogenous risks sometimes must be made while simultaneously facing one or more immutable exogenous background risks that are not under the control of the agent and that are independent of endogenous risks it is somehow natural to assume that an exogenous deterioration in background wealth will cause an individual to take more care elsewhere if we define a deterioration for example as making the individual poorer by removing a fixed amount of initial wealth we know from pratt 1964 that decreasing absolute risk aversion dara of an individual s von neumann morgenstern utility function yields this natural result if on the other hand background wealth becomes riskier due to the addition of a zero mean risk that is also statistically independent of all other risks behavior will be more risk averse if and only if preferences are risk vulnerable as defined by gollier and pratt 1996 risk vulnerability described below in section 4 is a stronger notion than dara and includes proper risk aversion pratt and zeckhauser 1987 and standard risk aversion eeckhoudt and kimball 1992 kimball 1993 as particular cases but a deterioration in background wealth may encompass more complicated distribution changes than the introduction of another statistically independent risk in this paper we examine background wealth deteriorations that take the form of both general firstand second degree stochastic dominance changes in risk fsd and ssd respectively in particular we determine conditions that are both necessary and sufficient for each of these two types of background risk changes to imply more risk averse behavior on the part of the individual for the case of fsd changes this condition turns out to be ross stronger characterization of decreasing absolute risk aversion in the case of general ssd changes in the distribution of background wealth the condition derived is a stronger version in ross sense of the conditions characterizing preferences that are locally risk vulnerable in the sense of gollier and pratt the necessary and sufficient conditions derived are fairly restrictive upon preferences however if we take as positive behavior that individuals act in a more risk averse manner whenever the distribution of background wealth deteriorates these conditions place canonical limits upon appropriate utility representations at the very least they

investment flexibility and the acceptance of risk abstract the hypothesis examined in this paper is that the greater the investor s flexibility the easier it is for him to change his portfolio depending on his results the more willing he will be to accept risks when the investor has no control on the size of the risky investment but can choose between one risky and one riskless asset this conjecture is shown to be correct however if there is more than one risky asset each period counterexamples demonstrate that flexibility rarely ensures greater risk taking for the standard portfolio problem in which investors are free to determine the size of their investment in a risky asset flexibility always raises the demand for the risky asset if constant relative risk aversion is less than unity but counterexamples can always be found when the constant relative risk aversion is larger than unity journal of economic literatureclassification numbers g11 d81 d84

functional forms for labor supply and commodity demands with and without quantity restrictions one of the most important current questions in economic analysis is whether or not labor markets clear in the short run to answer this it is necessary to be able to distinguish between restricted and unrestricted behavior by consumers supplying labor this paper investigates the forms of preferences which lie behind linear models of labor supply and derives the functional forms for commodity demands which accompany them both with and without quantity restrictions in the labor market simple linkages between restricted and unrestricted demands are also considered as is the question of perfect aggregation over consumers in the presence of quantity restrictions

strategic quality competition and the porter hypothesis abstract this paper offers new support for the porter hypothesis within the context of a quality competition framework we use a duopoly model of vertical product differentiation in which two firms simultaneously choose to produce either a high environmentally friendly quality or low standard quality variant of a good before engaging in price competition in this simple setting we show that a nash equilibrium of the game featuring the low quality good can be pareto dominated by a different strategy profile in which both firms opt in favour of the green product our analysis demonstrates that in such a case both firms stand to profit from the introduction of a rule penalizing any firm refusing to produce the environmentally friendly product we also find that consumers themselves may benefit from such regulations this is always the case when shifting from low quality to high quality production brings about a cost efficiency improvement

ramsey tax rules for economies with imperfect competition abstract this paper derives optimal commodity tax rules for a general equilibrium model with imperfect competition to achieve this functions are constructed that describe the effects of taxation upon the equilibrium prices and profit levels of imperfectly competitive industries the use of these functions allows existing tax rules to be generalised to accommodate imperfect competition

tax subsidy policies in the presence of environmentally aware consumers abstract we study policy measures to improve environmental quality in the presence of environmentally aware consumers we consider two sets of policy instruments uniform policies for the firms and policies that discriminate between the firms based on their environmental quality for the latter set either the better performer is rewarded with a subsidy or the worse performer is punished with a tax we find that while a uniform subsidy policy improves average environmental quality a uniform tax policy worsens it further while a discriminatory subsidy policy reduces total pollution and enhances aggregate welfare a discriminatory tax policy may increase total pollution and may reduce aggregate welfare

the role of food stamps in consumption stabilization although the food stamp program is the largest universal entitlement program in the social safety net little is known about its stabilizing role in household income and consumption using data from the panel study of income dynamics spanning 1980 99 we estimate the volatility of income with and without food stamps coupled with a variance decomposition of consumption among families at high ex ante risk of food stamp participation food stamps reduced income volatility by about 12 percent and food consumption volatility by about 14 percent there was however a marked decline in consumption smoothing benefits of the program in the early 1990s relative to the 1980s

the switching effect of environmental taxation within bertrand differentiated duopoly we investigate second best optimal taxation of the polluting variety of a product in a bertrand duopoly with differentiated varieties the analysis provides novel insight on a useful social function of environmental regulation besides internalizing the environmental externality the taxation of the polluting variety improves the matching of consumers and product varieties and so creates a socially desirable business switching between the differentiated varieties

work incentives and the food stamp program abstract labor supply theory makes strong predictions about how the introduction or expansion of a social welfare program impacts work effort although there is a large literature on the work incentive effects of afdc and the eitc relatively little is known about the work incentive effects of the food stamp program and none of the existing literature is based on quasi experimental methods we use the cross county introduction of the program in the 1960s and 1970s to estimate the impact of the program on the extensive and intensive margins of labor supply earnings and family cash income consistent with theory we find reductions in employment and hours worked when food stamps are introduced the reductions are concentrated among families headed by single woman

eco labels trade and protectionism eco labels are suspected to serve protectionist purposes we analyze the choice between an environmental standard and a voluntary eco label scheme in a partial trade model with one domestic firm and one foreign firm the environmental standard will only apply to the domestic firm while both firms can adopt the eco label pollution is production related and domestic consumers demand products that are produced in an environmentally friendly way our results show that it may be optimal for the domestic government to introduce an eco label and get both firms to adopt the label instead of setting an environmental standard however to what extent this policy serves protectionist purposes is ambiguous in particular if the willingness to pay for green products is sufficient to cover the pollution abatement costs of the foreign firm foreign firm profit will increase while domestic firm profit will decrease compared to the outcome with a domestic environmental standard on the other hand if the willingness to pay for green products is insufficient the foreign firm would be better off with a domestic environmental standard