Ian King

Bilingualism and Network Externalities

The authors develop a model in which the benefit of language acquisition is increasing in the number of individuals who speak the language. This gives rise to a network externality and, if language acquisition is costly, the language acquisition decisions by individuals may be inefficient. If the available policy instruments affect all members of a language group homogeneously, then policies that effectively subsidize language acquisition are warranted only for the majority language.

Industrial Blackmail: Dynamic Tax Competition and Public Investment

A dynamic model of intergovernmental competition for a large plant is presented, when local productivity is uncertain. One firm determines the location of its plant in each period by conducting an auction, soliciting bids from local governments. Equilibrium subsidies from the local governments are derived. The author also consider a two-stage game where local governments first choose a level of costly infrastructure then participate in the sequential auction. Even when costs are identical across locations, investing in different levels of infrastructure is a Nash equilibrium. Moreover, when infrastructure is endogenous in this manner, it is chosen efficiently.

Dynamic inefficiency, endogenous growth, and Ponzi games

We show that in competitive endogenous growth models without externalities, balanced growth equilibria are dynamically efficient. With learning-by-doing externalities, dynamic inefficiency may exist, but due to the mix of capital rather than its scale. These results are obtained independent of whether or not lifetimes are finite or generations overlap. In OLG models with externalities we show that Ponzi games may be feasible even though equilibria are characterized by undersaving.

Bidding for money

We analyze monetary exchange in a model that allows for directed search and multilateral matches. We consider environments with divisible goods and indivisible money, and compare the results with those in models that use random matching and bilateral bargaining. Two different pricing mechanisms are used: ex ante price posting, and ex post bidding (auctions). Also, we consider settings both with and without lotteries. We find that the model generates very simple and intuitive equilibrium allocations that are similar to those with random matching and bargaining, but with different comparative static and welfare properties.

RESIDUAL WAGE DISPARITY AND COORDINATION UNEMPLOYMENT

How much of residual wage dispersion can be explained by an absence of coordination among firms? To answer, we construct a dynamic directed search model with identical workers where firms can create high- or low-productivity jobs and are uncoordinated in their offers to workers, calibrated to the U.S. economy. Workers can exploit ex post opportunities once approached by firms, and can conduct on-the-job search. The stationary equilibrium wage distribution is hump-shaped, skewed significantly to the right, and, with baseline parameters, generates residual dispersion statistics 75-90% of those found empirically. However, the model underestimates the average duration of unemployment. Copyright 2006 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

A Competitive Theory of Employment Dynamics

We develop a model of search and unemployment in an economy consisting of a large number of spatially separated local competitive labour markets and aggregate uncertainty. If aggregate shocks are positively autocorrelated, the implied cyclical behaviour of the aggregate variables match those of empirical studies: worker movement and job creation are procyclical while total unemployment, job destruction and job reallocation are countercyclical.

Commitment, Efficiency and Footloose Firms

The authors consider dynamic competition between a small number of local governments to attract a single large plant. The surplus available in each location is unknown when the initial location decision is made. Two cases are considered: if all agents can commit to second period actions and if they cannot. Without commitment, initially the firm will discriminate against the region with the lower set-up costs. If first-period productivity is low, the firm may relocate and receive an ex post subsidy from a second region. Commitment decreases the expected total surplus and, if fixed costs are small, favors the firm. Copyright 1992 by The London School of Economics and Political Science.

Auctions Beat Posted Prices in a Small Market

In a model with two buyers and sellers we consider the choice of sales mechanism from three possibilities: posted prices, and auctions with and without reserve prices. With homogenous goods, sellers expected revenues are highest when both sellers auction with reserve prices 33% higher than if posting prices and 100% higher than if auctioning without reserve prices. When sellers can choose their mechanism before choosing prices, both sellers auction with a reserve price in the dominant strategy equilibrium. With heterogenous goods, the equilibrium with posted prices is inefficient (Montgomery (1991)) but the equilibria with both types of auctions are efficient.

The human development index as a criterion for optimal planning

Planning strategies that maximize the Human Development Index (HDI) tend towards minimizing consumption and maximizing non-investment expenditures on education and health. Interestingly, such strategies also tend towards equitable outcomes, even though inequality aversion is not modelled in the HDI. A problematic feature of strategies that maximize the HDI is that the income component in the index only role is to distort the allocation between health and education expenditure. Because the income component does not play its intended role of securing resources for a decent standard of living, we argue that it is better to drop income from the index in considering optimal plans. Alternatively, we consider net income, income net of education and health expenditures, as indicator of capabilities not already reflected in the education and life expectancy components of the index. When net income is used in a modified HDI index, optimal plans yield a balance between allocations for consumption, education, and health. Finally, we calculate our modified indexes for OECD countries and compare them with the HDI.

Investment decisions under first and second price auctions

A seller of an indivisible object faces multiple buyers, whose valuations are a function of their unobservable prior investments. A second price auction generates efficient investment, but the seller prefers a first price sealed bid auction, which induces inefficient investment.