Confidence management in contests By Shanglyu Deng, Hanming Fang, Qiang Fu, Zenan Wu Published in Journal of Economics & Management Strategy Abstract: An incumbent employee competes against a new hire for bonuses or promotions. The incumbent's perception of the new hire's ability distribution is biased. This bias can result in overconfidence or underconfidence. We show that debiasing may be counterproductive in incentivizing efforts. We then explore whether a firm that values employees’ efforts should disclose an informative signal about the new hire's type and we characterize the conditions under which transparency or opacity is optimal for the firm. We further consider four extensions [...]

Blocking patents, rent protection and economic growth By Michael A. Klein , Yibai Yang Published in Review of Economic Dynamics Abstract: We develop a Schumpeterian growth model to analyze the interaction between patent policy and firms' internal strategies to capture value from innovations. We consider two dimensions of patent policy: backward protection against imitation and forward protection, also known as blocking patents, against subsequent innovation that builds on a patented technology. Incumbent patent holders endogenously invest resources to protect their monopoly rents by impeding market entry of innovative competitors. We show that patent policy impacts economic growth through its influence on [...]

The n-player Hirshleifer contest By Christian Ewerhart and Guang-Zhen Sun Published in Games and Economic Behavior Abstract: While the game-theoretic analysis of conflict is often based on the assumption of multiplicative noise, additive noise such as considered by Hirshleifer (1989) may be equally plausible depending on the application. In this paper, we examine the equilibrium set of the n-player difference-form contest with heterogeneous valuations. For high and intermediate levels of noise, the equilibrium is in pure strategies, with at most one player being active. For small levels of noise, however, we find a variety of equilibria in which some but not necessarily all players [...]

Environmental regulation stringency and allocation between R&D and physical capital: A two-engine growth model By Juin-Jen Chang , Chien-Yu Huang , Chun Yee Wong , Yibai Yang Published in Journal of Economic Behavior & Organization Abstract: Many studies have identified the negative effect of environmental regulation on capital accumulation and the positive effect on innovation, but this observed capital-innovation tradeoff due to environmental regulation lacks theoretical underpinning. We fill this gap by developing a unified two-engine endogenous growth model with environmental regulation, and show that a stringent environmental policy (in terms of pollution tax) leads to a sectoral reallocation from dirty inputs [...]

Durable goods and consumer behavior with liquidity constraints By H. Youn Kim, José Alberto Molina, K. K. Gary Wong Published in Scandinavian Journal of Economics Abstract: This paper presents an integrated model of intratemporal demand and intertemporal consumption, with allowance for durable goods and liquidity constraints. Demand equations for nondurable and durable goods, with the user cost of durable goods, and a consumption Euler equation incorporating liquidity constraints, are jointly estimated for Norwegian consumers from 1979 to 2018. Results show that demand analyses ignoring durable goods leads to a significant bias in the elasticities of nondurable goods. Norwegian consumers are found to [...]

Innovation and Inequality from Stagnation to Growth By Angus C. Chu and Pietro Peretto Forthcoming in European Economic Review Abstract: This study explores the evolution of income inequality in an economy featuring an endogenous transition from stagnation to growth. We incorporate heterogeneous households in a Schumpeterian model of endogenous takeoff. In the pre-industrial era, the economy is in stagnation, and income inequality is determined by the unequal distribution of land. When the takeoff occurs, the economy experiences innovation and economic growth, and income inequality gradually rises until the economy reaches the steady state. We calibrate the model for a quantitative [...]

Contests with Sequential Entry and Incomplete Information By Shanglyu Deng, Qiang Fu, Zenan Wu and Yuxuan Zhu. Forthcoming in Theoretical Economics. Abstract: This paper provides a general study of a contest modeled as a multi-player incomplete-information all-pay auction with sequential entry. The contest consists of multiple periods. Players arrive and exert efforts sequentially to compete for a prize. They observe the efforts made by their earlier opponents, but not those of their contemporaneous or future rivals. We establish the existence and uniqueness of a symmetric perfect Bayesian equilibrium (PBE) and fully characterize the equilibrium. Based on the equilibrium result, we [...]

Export-Led Takeoff in a Schumpeterian Economy By Angus C. Chu, Pietro Peretto and Rongxin Xu Forthcoming in Journal of International Economics Abstract: This study develops an open-economy Schumpeterian growth model with endogenous takeoff to explore the effects of exports on the transition of an economy from stagnation to innovation-driven growth. We find that a higher export demand raises the level of employment, which causes a larger market size and an earlier takeoff along with a higher transitional growth rate but has no effect on long-run economic growth. These theoretical results are consistent with empirical evidence that we document using cross-country [...]

Speculation in Procurement Auctions By Shanglyu DENG Published in Journal of Economic Theory Abstract: A speculator can take advantage of a procurement auction by acquiring items for sale before the auction. The accumulated market power can then be exercised in the auction and may lead to a large enough gain to cover the acquisition costs. I show that speculation always generates a positive expected profit in second-price auctions but could be unprofitable in first-price auctions. In the case where speculation is profitable in first-price auctions, it is more profitable in second-price auctions. This comparison in profitability is driven by different [...]

Induced innovation and its impact on productivity growth in China: A latent variable approach By Ka Kei Gary Wong and Min Qiang Zhao Forthcoming in Empirical Economics Abstract: This paper proposes a latent variable approach to examine the induced innovation hypothesis originating from Hicks (The theory of wages, Macmillan, London, 1932). It allows a flexible decomposition of total factor productivity into Type I (exogenous) and Type II (induced) technical changes using a latent variable d as an argument in a variable cost function. By making extensive use of duality theory, we are able to estimate the Hicksian input demand functions, which are [...]