econ

6. Consider Baumol and Klevorick's model of rate of return regulation, with the added complication that revenue is uncertain. In particular, in addition to the usual assumptions of the model, the timing of the firm's decision is: 1. The firm chooses capital K. 2. The random variable it is revealed, which is added to the profit function: "(L.K.u) = R-WL- rk + u. Assume E(#) = 0. For the sake of graphs. you may assume u has a two-point distribution (the "good" outcome and "bad" outcome). 3. The firm chooses labor L and price p. Assume the firm is risk neutral, and that in the bad outcome profit is low enough that the ROR constraint does not bind. The regulator requires that the ROR constraint be met ex post, not just ex ante. Your proofs may be graphical or mathematical, with highest credit going toward complete mathematical arguments. a) Define L (K,u) to be the optimal labor to use after K is chosen and uncertainty is revealed. Illustrate the concentrated profit function :"(L (K,u), Ku) and the regulatory constraint. b) Will the firm earn the allowed ROR on average? c) State the Averch Johnson (A-J) effect. Does the A-J effect still hold in this model (ex ante and ex post)? d) Will the regulated firm use more or less capital than an unregulated firm?Section A 1. There are two players, I and 2. Each player owns a firm in a Cournot duopoly. The inverse demand function is P = 60- Q and both firms have the same cost function characterized by a constant marginal cost equal to 12 and zero fixed cost. The firms are run by managers who make all the relevant decisions. The objective of a manager is to maximize his own income. In the following assume that of e (0,1) . Consider the following game. First the owner of firm 1 (player 1) decides whether to appoint a manager with a profit-sharing contract (the manager of firm 1 gets the fraction a of the profit of firm 1) or a revenue-sharing contract (the manager of firm 1 gets the fraction a of the revenue of firm 1). Then player 1's decision is made public and the owner of firm 2 (player 2) makes a similar decision. Then player 2's decision is made public and, afterwards, the managers simultaneously and independently compete in output levels. Note that the value of a is fixed and is not subject to choice. The only choice each player has is between a profit-sharing and a revenue-sharing contract. (a) Sketch the extensive-from game. (b) Find the pure-strategy subgame-perfect equilibria of this game. [Hint: your answer will have to distinguish between different values of a.] (c) For the case where or = - find the payoffs of the two players at the subgame-perfect equilibrium. 20 (d) For the case where of = 1 20 give an intuitive explanation for the equilibrium: why do the players make those choices at the subgame-perfect equilibrium?2. HAL and JCN are the only producers of personal computers. Their computers are considered to be perfect substitutes by consumers. The demand function for computers is given by (Q denotes industry output and P price): Q =500 - - HAL and JCN compete in output levels (Cournot competition). JCN is a fully integrated firm (it produces all its inputs) and has a constant unit cost of production equal to 3. HAL, on the other hand, buys the CPUs from Entil (each computer requires one CPU). Entil publicly announces the (unit) price of CPUs and HAL takes that price as given and decides how many CPUs to buy. Besides the CPU, each computer requires a bundle of inputs that HAL produces internally at a (constant) cost of 1. Entil's (constant) cost of producing one CPU is 2. After many years of operation as separate firms, Entil and HAL apply to the government for permission to merge. Assume that the government is exclusively concerned with the welfare of consumers. Should the government allow the merger to take place? (give a detailed proof of your claim).Section B Question 3 (a) Discuss the logit demand model. In particular, discuss the assumptions underlying the model and the data needed to estimate the model (b) The next few questions deal with Berry, Levinsohn and Pakes (Econometrica 1995) which estimates a model partially based on the logit demand model. Discuss the empirical setting of the model and the data. (c) Discuss the major differences between BLP and a "standard" logit demand model as well as any issues/weaknesses with the standard model that BLP seek to address. (d) Give a brief overview of BLP's estimation strategy. Given the nature of their data are there additional hurdles that the authors must overcome? Discuss their results. (e) Compare and contrast BLP with Goldberg (Econometrica 1995). What are the similarities between the two papers? What the key differences in the data and estimation strategies? In doing so discuss Glodberg's empirical model and how it relates to the logit demand model. Question 4 This question relates to "New Empirical Industrial Organization" studies that seek to estimate market power levels without marginal costs data. (a) Discuss the identification strategy of NEIO models. That is, what equation NEIO papers are estimating as well as the theoretical underpinnings of this key equation? (b) The NEIO model has been challenged on at least two fronts. Discuss two challenges to the validity of the NEIO model. Be as specific as you can. (c) Discuss Genesove and Mullin (Rand 1998). What is the empirical setting, what is the key feature of their data, what is the main research question and what are the key results?Question 3 (a) Discuss the logit demand model. In particular, discuss the assumptions underlying the model and the data needed to estimate the model. (b) The next few questions deal with Berry, Levinsohn and Pakes (Econometrica 1995) which estimates a model partially based on the logit demand model. Discuss the empirical setting of the model and the data. (c) In which direction would you want to extend the demand model? What other data would you need? Can you "sign" the bias present in the simpler BLP model? (c) Discuss the major differences between BLP and a "standard" logit demand model as well as any issues/weaknesses with the standard model that BLP seek to address. In doing so, discuss Knittel and Metaxoglou. (d) Give a brief overview of BLP's estimation strategy. That is, outline the steps you would take to estimate a BLP model. Given the nature of their data are there additional hurdles that the authors must overcome? Discuss their results. (e) Suppose you wanted to use the results from a BLP demand model to simulate the outcome of a merger. How would this be done? Question 4 A recent paper seeks to understand how "suggested" prices affect competitive behavior. The background is as follows: In the Dutch gasoline market refiners (wholesalers) post "suggested" prices for gasoline retailers. These prices vary by location and time. The paper argues that these suggested prices facilitate tacit collusion. The paper has daily data on retail prices and suggested prices over a two-year period. (a) Discuss the theoretical argument of why suggested prices may influence competition. (b) What empirical information would you provide as initial evidence that is consistent with the theoretical argument? Obviously, I am not asking what they provide, but rather what your first step would be to support this argument. (c) What other data sources would you want to include in the analysis? Explain why. (d) Suppose you regressed the change in the retail price on the change in the suggested price and found a positive and statistically significant effect. Is this enough to conclude that suggested prices facilitate collusion? Why or why not.2. This question deals with Guerre, Perrigne, and Vuong, "Optimal Nonparametric Estimation of First-Price Auctions" (Econometrica, 2000), Haile and Tamer, "Inference with an Incomplete Model of English Auctions" (JPE, 2003) and Haile, Hong, and Shum, "Nonparametric Tests for Common Values in First-Price Sealed-Bid Auctions" (2005). Common Assumptions to both (a) and (b): There are / potential bidders. Assume / is exogenous and known. Bidders are symmetric and risk-neutral. Independent Private Values. Each bidder draws her private value v, from a common distribution F(v), which has a support [0, co). (a) Consider a single-object, first-price sealed-bid auction. Assume there is no reserve price for simplicity. Carefully derive symmetric Bayesian Nash equilibrium bidding strategies, A(v.). (Consider increasing and differentiable strategies only.) (b) Consider a single-object, Milgrom-Weber "button" auction. The seller's value for the object is vo and she wants to maximize her revenue from the auction by setting a reserve price r. Write down the seller's maximization problem and derive a condition for the optimal reserve price ,* from the F.O.C. of the max problem. (c) Describe, as fully as you can, the nonparametric identification result and the two-step nonparametric estimation strategy of GPV (2000). (d) State the two axioms (or behavioral assumptions) of Haile and Tamer (2003) and construct, as fully as you can, the nonparametric (partial) identification result of Haile and Tamer (2003). Discuss the advantages and disadvantages of this incomplete approach. (e) Discuss, in general, the advantages and disadvantages of using structural models when conducting empirical research in auctions. (f) Prove the following theorem from Haile, Hong, and Shum (2005), which is the basis of their nonparametric test of common values. Theorem Under standard assumptions of symmetry, affiliation, nondegeneracy and an additional assumption of exogenous participation, v(x, x, ") is invariant to " for all x in a PV model, but strictly decreasing in n for all x in a CV model, where v(x, x', ") = E[V,| X, = x,max X, = x'].Section C Question 5 Production Function Estimation. Suppose that you have a random cross section of firm- level data, with information on output, labor and capital. In logs, (uni, hi, k : i = 1, 2, ..., N} You are interested in estimating the Cobb-Douglas production function: wi = auditakkitwiter 1. Discuss the issues with estimating this PF using OLS. 2. What are the two main reasons (in terms of identification, not availability) why input prices are likely poor candidates for instruments? 3. Now suppose that you have panel data and want to estimate the Olley & Pakes (1996) model. Describe clearly how to implement the two-step approach that they propose. 4. What are the three assumptions/requirements for identification of az? 5. What is the basis of the Ackerberg, Caves, & Fraser (2006) critique of the OP model? 6. What assumptions do they suggest that allow the OP approach to be salvaged? How does the two-step procedure change in this context? Question 6 Dynamic Discrete Choice Models. 1. Discuss the main challenges inherent in empirical estimation of dynamic games. Pick the two or three most important, in your view. Be clear and concise. 2. Define a Markov Perfect Equilibrium. Explain why it is useful in estimation of dynamic games. Practically speaking (and in plain english), what does it imply about the beliefs of firms? 3. The next few questions relate to the Pakes, Ostrovsky, & Berry (2007) model, but touch on some common elements of dynamic estimation more generally. Below is the Bellman 2 equation for incumbent firms in the POB framework. What data are required to estimate the parameters of interest in the POB model? To which static entry/exit model is this most similar? Name the types of firms that this (static) paper examined. VC(n, z;0) = _ [#(m', ?'; 0) + BEsmart, VC(n', =';0)}]] P(n', ='In, z, x = 1) where w(n, 2; 0) is a one-period profit function, n is the number of active firms, z is a vector of exogenous profit shifters, 0 is the parameter vector, e and z are the number of entrants and exitors, respectively, $ is the sell-off (exit) value, and x is an indicator variable equal to one if an incumbent remains