The paper “Conservation Procurement Auctions with Bidirectional Externalities,” with Ana Espinola-Arredondo and Pak-Sing Choi (one of our PhD students, now on the job market) is now accepted at the Journal of Environmental Economics and Management. We study a conservation procurement auction with externalities, where the latter can stem from market to conservation activities, and from conservation to market activities. First, we show that each market failure alone (the asymmetric information that the procurer faces or the presence of externalities) deviates output away from the first best. More surprisingly, however, we demonstrate that, their coexistence, rather than producing larger output inefficiencies, can move output closer to the first best when externalities are small. Link.
I am happy to announce that my new book, Advanced Microeconomic Theory: An Intuitive Approach with Examples, is now published by MIT Press. The book emphasizes the intuition behind mathematical assumptions, includes several step-by-step examples, and applications to experimental economics within each chapter. The book is mainly oriented to Master students in Economics and Finance, and to Ph.D. students in programs with an applied focus. This book seeks to fill the void of textbooks at the Masters level, since MWG and JR are often too technical for many students, and Varian can be too succinct. Link to book.
The publisher also offers a workbook accessible to students, Practice Exercises for Advanced Microeconomic Theory, with detailed answer keys, which students can use to transition from theory to practice, and prepare for exams. Link to workbook.
The paper “Non-profit Product Differentiation,” with Robert Rosenman, is now published in Economics Bulletin. We introduce non-profit firms in a Hoteling model of product differentiation in two different dimensions. Unlike for-profit settings, which finds maximal differentiation only in one characteristic (the one most salient to consumers), we show that the presence of at least one nonprofit firm leads to minimal differentiation in both dimensions. We extend the analysis to mixed competition between a nonprofit firm and a for-profit firm. Link.
The paper “Information Transmission During the Trial: The Role of Punitive Damages and Legal Costs,” with Ana Espinola-Arredondo and Pitchayaporn Tantihkarnchana (one of our PhD students, now at Penn State), is now forthcoming in the Journal of Public Economic Theory. This article studies an incomplete information model in which a preventable accident occurred. The judge determining punitive damages observes the firm’s (defendant) investment decisions, but is uninformed about the firm’s experience adopting safety measures. Link.
I am back at WSU! Ana and I spent the spring semester at the School of Economics (Economic Theory Section) of the University of Barcelona. We are extremely thankful to Prof. Xavier Raurich, Prof. Antonio Manresa, and all other members of the department who made us feel at home, and supported us during a very productive semester.
My paper “Firm Preferences for Environmental Policy: Industry Uniform or Firm Specific?,” with Sherzod Akhundjanov (PhD from WSU, now at Utah State) is now published at Strategic Behavior and the Environment. Our article analyzes whether firms have incentives to lobby for industry uniform environmental policies, and when they prefer a more “fined tuned” regulation that considers each firm’s specific costs and pollution. Link.
The textbook that Daniel Toro-Gonzalez (one of our WSU Ph.D.s) and I have been working on for the last years is now published by Springer-Verlag. The book’s title is “Strategy and Game Theory: Practice Exercises with Answers” and it provides an applied approach to solution concepts in game theory, offering step-by-step solutions to more than 90 exercises. We first examine exercises on Nash equilibrium, Subgame perfect equilibrium and repeated games, and then move to more advanced topics such as Bayesian Nash equilibrium, Perfect Bayesian equilibrium, and Signaling games. Each chapter starts with a short theory presentation, and then jumps into solving several exercises, where we walk the reader through the mathematical steps and the economic intuition behind each result. Its style should be accessible to both undergraduate and Masters students. Link to book.
The paper “Can Polluting Firms Favor Regulation?” (with Sherzod Akhundjanov, one of our Ph.D. students, now an Assistant Professor at Utah State University) is published in The B.E. Journal of Economic Analysis and Policy. Paper.
The paper “Profit-Enhancing Environmental Policy: Uninformed Regulation in an Entry-Deterrence Model,” (with Ana Espinola-Arredondo) is now published in the Journal of Regulatory Economics. Paper.
The paper “An Excessive Development of Green Products?” (joint with Ana Espinola-Arredondo) is now published by Economics of Governance. Paper.
In “Profit-Enhancing Environmental Policy: Uninformed Regulation in an Entry-Deterrence Model” (joint with Ana Espinola-Arredondo) we study under which contexts environmental policy can facilitate firm’s ability to convey or conceal their cost structure from potential rivals, and ultimately entail a positive effect on their profits. Surprisingly, this occurs when their pollution is particularly damaging for the environment, and then the regulator needs to impose stringent emission fees! Paper.
In “Firm Preferences for Environmental Policy: Industry Uniform or Firm Specific?” (joint with SherzodAkhundjanov, Ph.D. candidate) we investigate the preferences of green and brown firms for uniform (i.e., industry wide) and non-uniform (firm specific) environmental regulation. While both types of regulation increase firms’ costs, and thus entail a negative effect on profits, we show that non-uniform regulation can also yield a positive effect for relatively inefficient firms by alleviating their cost disadvantage. As a consequence, we demonstrate that firms’ support for environmental policy not only originates from the most common ally (green firms) but also from polluting firms. Paper.
The paper “The Signaling Role of Subsidies” (with Ana Espinola-Arredondo) is now forthcoming in the B.E. Journal of Economic Analysis and Policy. In this paper we demonstrate that regulators can strategically design subsidies to facilitate, or inhibit, the incumbent firm’s entry-deterring practices, depending on which outcome yields the largest social welfare. Hence, while entry deterrence arises under certain conditions, its effects are always welfare improving. Link to the paper,
In “International Coordination of Environmental Policies: Is it Always Worth the Effort?” (joint with Ana Espinola-Arredondo, and Jude Bayham, a former Ph.D. student now in a postdoc at Yale) we study the use of entry subsidies as an alternative form of environmental policy. Given the strong political opposition to standard output subsidies, several countries have recently used entry policies to promote renewable energy technology, such as solar panels and biofuels. We study a two-stage game in which two regulators choose an entry policy (i.e., tax, subsidy, or permit) to maximize domestic welfare, and firms then compete a la Cournot. We find that both domestic (uncoordinated) policies and internationally (coordinated) policies increase welfare. However, the welfare gains from international policy coordination are only large when the product is extremely clean. These results indicate that the welfare gains of international policy coordination may only offset the costs of negotiation in relatively clean industries. Paper.
The paper “Can Poorly Informed Regulators Hinder Competition?” (with Ana Espinola-Arredondo) is now forthcoming in Environmental and Resource Economics. We evaluate firms’ entry-deterring incentives when facing emission fees from a regulator whose information exhibits different degrees of accuracy. In particular, we show that a perfectly informed regulator only sets emission fees that support firms’ entry-deterring practices under restrictive conditions. However, as the regulator becomes more poorly informed, we demonstrate that he is willing to sustain firms’ entry-deterring behavior under larger conditions. Paper.
The paper “Why do Firms Oppose Entry-Deterring Policies? Environmental Regulation and Entry Deterrence” (with Ana Espinola-Arredondo) is now forthcoming in Environment and Development Economics. The paper analyzes settings under which governments prefer relatively inflexible policy regimes, whereby emission fees cannot be redesigned if the market conditions change, rather than flexible regimes, in which fees can be rapidly adjusted. Furthermore, we examine contexts in which regulators strategically set emission fees in order to deter potential entrants, and study under which conditions the incumbent firm favors or opposes these emission fees. Link.
The paper “Cooperation and Signaling with Uncertain Social Preferences” with John Duffy (University of Pittsburgh) is now published in Theory and Decision. We analyze how players cooperate during the first rounds of interaction to disguise themselves as cooperative players (or players with concerns for fairness), in order to defect in the last round of play (“backstabbing” their opponents); a recurrent observation in several experiments. Link.
Governments are often actively engaged in assessing the scarcity of common pool resources in order to prevent their overexploitation. The article “Asymmetric Information may Protect the Commons: The Welfare Benefits of Uninformed Regulators” (with Ana Espinola-Arredondo), now published in Economics Letters, shows, however, that uninformed regulators should not necessarily conduct such efforts. In particular, a larger welfare may arise when the firms that exploit the commons operate under asymmetric information about the available stock, with incumbent firms being better informed than the potential entrants. Quite surprisingly, our results suggest that, in an entry-deterrence context, regulatory authorities do not need to closely monitor natural resources. Paper.
The paper “The Entry-Deterring Effects of Inflexible Regulation” (with Jude Bayham and Ana Espinola-Arredondo) is now published at the Canadian Journal of Economics. Here is a link to the paper and associated slides.
Regulators are rarely either perfectly informed or completely uninformed when regulating polluting industries. Instead, they have access to relatively imprecise information about firms’ costs. In the paper “Can Poorly Informed Regulators Hinder Competition?“(with Ana Espinola-Arredondo), we analyze firms’ entry-deterring incentives when facing emission fees from a regulator whose information exhibits different degrees of accuracy. In particular, we show that a perfectly informed regulator only sets emission fees that support firms’ entry-deterring practices under restrictive conditions. However, as the regulator becomes more poorly informed, we demonstrate that he is willing to sustain firms’ entry-deterring behavior under larger conditions. Paper.
Several firms using clean technologies, such as General Electric and AEG, often support the introduction of stringent environmental regulation. Nonetheless, we also observe polluting companies, such as the mining company Rio Tinto, BP or DuPont, promoting the introduction of strict environmental regulation. In this paper (with Sherzod Akhundjanov, Ph.D. candidate), we study such a surprising behavior. In particular, we show that dirty firms competing against a green rival can actually obtain larger profits when the regulator is present than absent, thus leading the polluting firm to support the regulator’s task in certain settings. Paper.
Subsidies are often regarded as a tool to induce optimal output levels, overlooking their informative role as signals to potential firms who seek to enter an industry. In “The Informative Role of Subsidies” (with Ana Espinola-Arredondo), we demonstrate that regulators strategically design subsidies to facilitate, or inhibit, the incumbent firm’s entry-deterring practices, depending on which outcome yields the largest social welfare. Hence, while entry deterrence arises under certain conditions, its effects are welfare improving. Links to the paper, and the seminarslides at WSU.
Here is the paper in which Jude Bayham, Ana Espinola-Arredondo and I have been working during the last few months: “The Entry-Deterring Effects of Inflexible Regulation.” We analyze the use of environmental policy as a tool that facilitates firms to conceal information from potential entrants, thus deterring entry from the industry. Yet, we show that such policies can be welfare improving. Furthermore, we demonstrate that entry deterrence is more likely to arise when environmental regulation cannot be rapidly revised across time (inflexible regimes) than when it can (flexible regimes) Paper and associated Slides.
Undergraduate students often find auction theory, and optimal bidding strategies, especially challenging. While the technical literature using auction theory has rapidly expanded in the last decade, most undergraduate textbooks do not cover the topic, or provide short verbal descriptions about it. Here is a friendly introduction to auction theory for both undergraduate and Masters students, including applications and worked-out examples. (It is forthcoming in the Journal of Economics and Economic Education Research.) Paper and associated Slides.
Firms have recently introduced lines of “green” products, in addition to the products they traditionally sell. The development of these products is usually regarded as a desirable objective by the general public, and often supported with a myriad of public policies, including generous subsidies. This paper shows, however, that such a development of green products can become socially excessive in certain contexts. Link.
The paper “When does Environmental Regulation Facilitate Entry-Deterring Practices?” (co-authored with Ana Espinola-Arredondo) is now accepted for publication at the Journal of Environmental Economics and Management. The paper evaluates the welfare benefits of an environmental regulatory agency under different information contexts. We specifically show under which settings the regulator’s ignorance of the informative context in which the industry operates might lead him to under- or over-estimate the welfare benefits from environmental policy. Link.
The paper with Gulia Zaynutdinova (Ph.D. candidate, Finance Department) has now been accepted for publication at the Journal of Industry, Competition and Trade. We study the expansion decision of a firm that privately observes whether it faces a capacity constraint, and how such an expansion decision affects entry patterns. We furthermore identify a potential risk of subsidies often overlooked by the existing literature: while uninformed regulators can facilitate the informative role of the expansion decision if the subsidies he provides are relatively low, he can leave inefficient entry patterns unaffected if subsidies become too generous. Link.
Here is an updated (and significantly shorter!) version of the paper “Why do Firms Oppose Entry-Deterring Regulation?” (co-authored with Ana Espinola-Arredondo). The paper analyzes settings under which governments prefer relatively inflexible policy regimes, whereby emission fees cannot be redesigned if the market conditions change, rather than flexible regimes, in which fees can be rapidly adjusted. Furthermore, we examine contexts in which regulators strategically set emission fees in order to deter potential entrants, and study under which conditions the incumbent firm favors or opposes these emission fees. Link.
The Perfect Bayesian Equilibrium (PBE) solution concept is often one of the most challenging topics in game theory and IO courses, both for undergraduate and graduate students. In this paper, now published at the Journal of Industrial Organization Education, I provide is a systematic five-step procedure to find all pure-strategy PBEs in incomplete information games, including a worked-out example: Links to the paper, and to the associated slides.
The paper with John Duffy (Univ. of Pittsburgh) “Patience or Fairness: Analyzing Social Preferences in Repeated Games” is now accepted in Games. We show that fairness concerns operate as a “substitute” for time discounting in the infinitely-repeated game, as fairness helps sustain cooperation for lower discount factors. In addition, we also demonstrate that such cooperation can be supported under larger parameter values if players are informed about each others’ social preferences than if they are uninformed. Link.
Ana presented the paper “Environmental Protection Agencies: Measuring the Welfare Benefits from Regulation under different Information Contexts” at the International Industrial Organization Conference in George Mason University (Arlington, VA). Here is a link to the updated version of the paper, now under the title “When does Environmental Regulation Facilitate Entry-Deterring Practices?”.
I presented the paper “The Informative Role of Subsidies” (co-authored with Ana Espinola-Arredondo) at theInternational Industrial Organization Conference in Arlington, VA (my favorite conference of the year!). Here are the updated version of the paper.
We finally revised the paper “When does Disinformation Promote Successful Treaties?” with Ana Espinola-Arredondo. Among other things, we introduce a parametric example in several sections of the paper to facilitate the application of our model to standard public good games. Link.
Here is the paper Ana and I have recently been working on (and talking to many of you): “Don’t Forget to Protect Abundant Resources.” We show that incumbents exploiting a common pool resource (CPR) strategically increase their exploitation level in order to deter further entry under certain conditions. In addition, such entry-deterring practice yields welfare gains (relative to unthreatened entry) if the resource is relatively scarce, but produces welfare losses when the resource is abundant. Against common belief, this result suggests that policies that protect the CPR from further entry are actually more necessary when the resource is abundant than when it is scarce! Link.
The Journal of Industry, Competition and Trade published “Uncovering Entry Deterrence in the Presence of Learning-by-Doing” (co-authored with Ana Espinola-Arredondo). We show that the presence of strong learning-by-doing effects in an industry, rather than hindering the detection of entry-deterring practices by regulatory agencies, can actually facilitate such a task. Link.
After several months, here is the paper with John Duffy (Univ. of Pittsburgh) “Cooperation and Signaling with Uncertain Social Preferences.” It analyzes how players cooperate during the first rounds of interaction to disguise themselves as cooperative players (or players with concerns for fairness), in order to defect in the last round of play (“backstabbing” their opponents); a recurrent observation in several experiments. Link.
Here is an updated version of the paper with Ana Espinola-Arredondo, “Commitment in Environmental Policy as an Entry-Deterring Tool,” which analyzes under which conditions countries voluntarily “tie their hands” by committing to a stringent environmental policy across time, which deters further entry in an industry and, in certain cases, increases social welfare. Link.
We noticed that the paper “The Intuitive and Divinity Criterion: Interpretation and Step-by-Step Examples” (co-authored with Ana Espinola-Arredondo) is not handled by Berkeley Electronic Press anymore. Please don’t hesitate to contact me if you are interested in the paper. (Note that, besides the paper, we also developed class slides, a homework assignment, and its corresponding answer key, which should also be available from the publisher. Otherwise, contact me). Link.
The EPA has recently been subject to several criticisms (some of them nasty!). In the paper “When does Environmental Regulation Facilitate Entry-Deterring Practices?” (co-authored with Ana Espinola-Arredondo), we evaluate the welfare benefits of an environmental regulatory agency under different information contexts. We specifically show under which settings the regulator’s ignorance of the informative context in which the industry operates might lead him to under- or over-estimate the welfare benefits from environmental policy. Link.
Ana presented our paper “When does Disinformation Promote Successful Treaties?” at the Political Economy of International Organizations Conference (we like to hang out with political scientists as well!) in Philadelphia, PA. Here is the link to the paper.
Here is the paper with Gulia Zaynutdinova (WSU, Dept. of Finance), “Capacity Constrained Firms and Expansion Subsidies: Should Governments Avoid Generous Subsidies?” We study the expansion decision of a firm that privately observes whether it faces a capacity constraint, and how such an expansion decision affects entry patterns. We furthermore identify a potential risk of subsidies often overlooked by the existing literature: while uninformed regulators can facilitate the informative role of the expansion decision if the subsidies he provides are relatively low, he can leave inefficient entry patterns unaffected if subsidies become too generous. Link.
The updated version of the Lectures Notes on Advanced Microeconomic Theory (first semester, Ph.D. Micro) is now posted on the course website. (They now contain the worked-out exercises corresponding to the weekly review sessions at the end of every chapter.) This is the link to the lectures notes (605 pages!), and here is more information about exercises, answer keys, slides, etc. Link.
The paper with Esther Gal-Or (Univ. of Pittsburgh) and Ana Espinola-Arredondo (WSU), “When should a firm expand its business? The signaling implications of business expansions,” is now published in the International Journal of Industrial Organization (IJIO). We examine an incumbent’s trade-off between the improved efficiency that business expansion facilitates (cost-reducing effect) and the signaling role that business expansion plays in conveying information to potential entrants about the state of demand. Link.
The Journal of Regulatory Economics published an on-line version of the paper “When do firms support environmental agreements?” (co-authored with Ana Espinola-Arredondo). We identify that the more stringent environmental policy implemented in international agreements has two opposite effects on firms’ profits: a negativeeffect due to larger abatement costs, and a positive effect, originating from the amelioration of overproduction under oligopoly. As you probably anticipated… when the positive effect dominates, firms actually lobby in favor of their countries’ involvement in this type of treaties, such as the Kyoto’s protocol. Link.
The paper with Ana Espinola-Arredondo “Can Incomplete Information Lead to Under-exploitation in the Commons?” is now published in the Journal of Environmental Economics and Management (JEEM). We show under which settings an incumbent firm exploiting a common pool resource might strategically reduce its appropriation in order to conceal the stock level from potential entrants, thus deterring entry into the commons. Link.