Working papers

[abstract] This paper studies a monopolist's optimal innovation problem when innovation spending raises the scale of demand. I show that regulation of the monopoly price in such a market may potentially bring more harm than good to consumers by reducing the firm's incentive to innovate. Whether regulation is beneficial or harmful depends on the nature of the market. Regulation is beneficial only in markets where the demand depreciates relatively slowly. In other markets regulation is in the long run harmful.

JEL Classifications: L12, L21, L22, L41 & L51
Key Words: innovation, monopoly, regulation, consumer welfare

Publications

[abstract] The economic rationale for how much market power is tolerable has so far been based mainly on static considerations; ideally, however, it should discriminate between persistent and transitory market power. I propose a dynamic dominant-firm type of model where the firm's use of market power, when it is discovered by an antitrust agency, will be penalized. Equilibrium entails a threshold market share above which the market tends to monopoly, and below which the market tends to competition. One may propose the region below this threshold to be the safety zone. The size of this region depends on how fast market power depreciates. In industries in which this depreciation is fast and where, as a result, monopoly power is more transitory, the safety zone should be wider, and there should be less policy intervention.

JEL Classifications: L10, L20 & L40
Key Words: dominant firm, transitory dominance, persistent dominance

[abstract] This paper studies a dynamic model of an industry life cycle based on increasing returns in the cost of growth whereby large firms can grow more easily. When there are strong increasing returns in the adjustment cost function, the model exhibits multiple rest points and firms do not necessarily all end up in the same state. The model generates typical life cycle stages including a shakeout. The likelihood of survival is positively correlated with the entering size, an implication that fits empirical findings that exiting firms are small not only just prior to exit but also at the time of entry. The model also explains newer findings on the evolution of moments, an increase in the skewness and the spread of firm-size distribution before the shakeout and a decline in these with the start of the shakeout.

JEL Classifications: L10 & 20
Key Words: increasing returns, heterogeneity, survival, size distribution

[abstract] We analyze the role of social environment and human capital formation in persistence of poverty and inequality. We present a Romer (1990) type variety model where the presence of economies of agglomeration in social environment may cause two basins of attraction; whereby we may interpret the lower basin as a poverty trap and the upper basin as a take-off region. The long-run economic status of households and the formation of social environmental capital and human capital crucially depend on its initial social and human resources in the community. We also consider the size of income transfer to regions and its effect on inequality and welfare. We provide supporting evidence of existing inequality and poverty trap using educational attainment data for the U.S..

JEL Classifications: C61, O15, R11
Key Words: inequality, growth, social environment, human capital, economies of agglomeration
Appendices:

[abstract] We study an ecological management problem where economic agents' activities interact with the dynamics of natural resources. We follow the work by Brock and his various co-authors and use the example of a shallow lake which is subject to pollution due to phosphorous loading. Low loading preserves resilience of the ecosystem (oligotrophic state) where high loading may lead to the deterioration of the ecosystem (eutrophic state). Welfare is calculated from expected discounted net benefits: benefits accrue to agricultural interests from activities that result in phosphorous loading and costs - resulting from deterioration of water quality - accrue the enjoyers of the lake. The interaction of the dynamic decision problem maximizing welfare and the dynamics of the ecosystem admits multiple equilibria, thresholds and complicated global dynamics. We consider instruments of a regulatory agency, for example, state dependent tax rates that may help to maintain and to enhance resilience by enlarging the domain of attraction of the low pollution equilibrium (oligotrophic state) or make it the sole attractor. The complicated global dynamics is analytically studied by using the Hamilton-Jacobi-Bellman (HJB) equation and numerically solved through dynamic programming.

JEL Classifications: C61,C63, Q2, Q25, Q28
Key Words: renewable resources, ecological management, optimal taxation, Bell equation, dynamic programming

[abstract] This chapter considers a simple dynamic investment decision problem of a firm where adjustment costs have capital size effects. This type of setting possibly results in multiple steady states, thresholds, and a discontinuous policy function. We study the global dynamic properties of the model by employing the Hamilton-Jacobi-Bellman method and dynamic programming that help us in the numerical detection of multiple equilibria and thresholds. We also explore the model’s implications concerning the effects of aggregate demand, interest rates, and tax rates. Finally, an empirical study on the firm size distribution is provided using U.S. firm-size data. We utilize two different approaches, Kernel density estimation and Markov chain transition matrix, to study an ergodic distribution. Our results suggest twin-peak distribution of firm size in the long run, which empirically supports the theoretical conjecture of the existence of multiple steady states.

Key Words: Adjustment costs, multiple steady states, global dynamics, discontinuous policy function

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