Yang-Ming Chang

On the Economics of Compliance With the Minimum Wage Law

This paper reexamines the issues of compliance with and enforcement of the minimum wage law recently addressed in this Journal by Ashenfelter and Smith and by Grenier. Pursuing a more rigorous methodology we are able to add new general conclusions, and correct and reconcile some previous conflicting conclusions concerning the role of the disparity between the minimum and free market wages, the level and elasticity of labor demand, and the magnitude of deterring monetary sanctions on the noncompliance decision. Our formulation also addresses the law evasion (reduced wages) as well as the law avoidance (modified employment) aspects of the noncompliance decision, which previous formulations have ignored.

Insurance, Protection from Risk, and Risk-Bearing

By extending Ehrlich and Beckers analysis of the demand for insurance we derive several new propositions concerning the demand for self-insurance, self-protection, and market insurance under alternative market conditions. A key behavioural prediction is that if the price of market insurance were responsive to self-protection, then the latter would induce a substitution away from self-insurance and towards market insurance, regardless of the fairness of insurance terms, as long as the utility function exhibits constant or decreasing absolute risk aversion. We compare two of our results to earlier results recently published in this journal by Boyer and Dionne.

THE FATE OF DISPUTED TERRITORIES: AN ECONOMIC ANALYSIS

This paper presents a simple model to characterize the outcome of a land dispute between two rival parties using a Stackelberg game. Unlike Gershenson and Grossman (2000), we assume that the opposing parties have access to different technologies for challenging and defending in conflict. We derive the conditions under which territorial conflict between the two parties is less likely to persist indefinitely. Allowing for an exogenous destruction term as in Garfinkel and Skaperdas (2000), we show that, when the nature of conflict becomes more destructive, the likelihood of a peaceful outcome, in which the territory’s initial possessor deters the challenging party, increases if the initial possessor holds more intrinsic value for the disputed land. Following Siqueira (2003), our model has policy implications for peace through third‐party intervention.

RAISING THE COST OF REBELLION: THE ROLE OF THIRD‐PARTY INTERVENTION IN INTRASTATE CONFLICT

This paper presents a simple model to characterize explicitly the role that an intervening third party plays in raising the cost of rebellion in an intrastate conflict. Extending the Gershenson‐Grossman (2000) framework of conflict in a two‐stage game to the case involving outside intervention in a three‐stage game as in Chang et al. (2007b), we examine the conditions under which an outside party optimally intervenes such that (i) the strength of the rebel group is diminished or (ii) the rebellion is deterred altogether. We also find conditions in which a third party optimally intervenes but at a level insufficient to deter rebellion. Such behavior, which improves the incumbent government’s potential to succeed in conflict, is overlooked in some conflict studies evaluating the effectiveness of intervention. One policy implication of the model is that an increase in the strength of inter‐governmental trade partnerships increases the likelihood that third‐party intervention deters rebellion.

Corporate Social Responsibility and International Competition: A Welfare Analysis

This paper examines the welfare implications of corporate social responsibility (CSR) in international markets under imperfect competition. Based on a stylized model of an import-competing duopolistic market, we show the feasibility of moving toward tariff reductions when both domestic and foreign firms launch CSR initiatives in that their payoffs include not only individual profits, but also the benefits of consumers. For the case where the foreign exporter unilaterally adopts the consumer-oriented CSR as a strategy, there is a rent-shifting effect because the foreign firms payoff increases whereas the domestic firms profit decreases. In response, the importing countrys government raises its tariff on the foreign product. If, instead, the domestic firm adopts the CSR strategy unilaterally, the rent-shifting effect disappears and both the competing firms’ payoffs increase. We further identify the conditions under which the CSR initiatives of the firms constitute the dominant strategy, leading to a Pareto efficient outcome at which the firms’ payoffs, consumer surplus, and social welfare are at their maximum levels.

WAR OR SETTLEMENT: AN ECONOMIC ANALYSIS OF CONFLCIT WITH ENDOGENOUS AND INCREASING DESTRUCTION

This paper presents an economic analysis of the optimal choice between war and settlement when armed conflicts involve weapon costs and endogenously increasing destruction to consumable resources. In contrast to some earlier findings in the conflict literature, we derive conditions under which war dominates settlement as the Nash equilibrium choice in a one-period game without incomplete information or misconceptions. These conditions are shown to depend not only on resources allocated to the production of military weapons, but also on the endogenous destructiveness of weapons used in warfare. We show that contending parties always allocate more resources to arms productions under settlement (in the shadow of conflict) than under war. When total destruction is less than the difference in arms productions between settlement and war, each party’s expected payoff is relatively higher under war. As a result, war dominates settlement. But, when total destruction is greater than the difference in arms productions between settlement and war, each party’s expected payoff is relatively higher under settlement. In this case, settlement dominates war and the larger scale of destructiveness associated with higher arms levels generates an effective deterrence for ‘armed peace’. One implication of the positive analysis is that, under the threat of conflict, arms reductions for promoting peace can never be voluntary.

The Continued Dumping and Subsidy Offset Act: An Economic Analysis

Under the Continued Dumping and Subsidy Offset Act (CDSOA) of 2000, the U.S. government distributes the revenue from anti-dumping and countervailing duties to domestic firms alleging harm. In this article, we develop a simple model to examine the economic effect of the CDSOA. For the case in which the “offset payments” to domestic firms are linked to the volume of foreign imports, the CDSOA may increase foreign imports when the domestic market is more competitive than in the Cournot equilibrium. This finding runs contrary to what the E.U. and some exporting countries have claimed. But if the market is less competitive than in Cournot, the CDSOA becomes an instrument of trade protectionism.

Endogenous Destruction in Conflict: Theory and Extensions

This article develops a general equilibrium model of conflict to characterize the implications of endogenous destruction for bargaining and fighting. Specifically, we consider the scenario where two contending parties engage in bargaining to avoid fighting when there are direct costs (e.g., arms buildups) and indirect costs (e.g., destruction to consumable resources) of conflict. Without imposing specific functional form restrictions on conflict, production, and destruction technologies, we show their interactions in determining an optimal decision between fighting and bargaining. We find that, under the shadow of conflict, bargaining is costly as the contending parties always allocate more resources to arming for guarding settlement through bargaining than in the event of fighting. In contrast to conventional thinking that bargaining is Pareto superior over fighting, we show conditions under which fighting dominates bargaining as the Nash equilibrium choice. The positive analysis may help explain the general causes of fighting, without resorting to the assumption of incomplete information or misperceptions.

Digital piracy: Price-quality competition between legal firms and P2P network hosts

This paper examines competition between firms that produce legal information goods and host sites that index P2P links. Specifically, we develop a simple model in which a legal firm determines price for its information good and a P2P host site decides on its investment to improve the quality and accessibility of the information goods linked to its site for free download. In the analysis, users choose between goods that are both horizontally and vertically differentiated. We show conditions under which the profitability of legal firms may or may not be negatively affected by the presence of a P2P network. In addition, we demonstrate the resilience of P2P host sites to distribute digital goods. Our approach extends earlier studies in the literature to further allow for price-quality competition between legal firms and P2P network hosts.

Free trade areas, the limit of Rules of Origin, and optimal tariff reductions under international oligopoly: A welfare analysis

In this article we analyze the economic effects associated with preferential Rules of Origin (RoO) in a free trade area (FTA). By presenting a stylized three-country model of trade under oligopoly, we show that there exists a maximum limit of RoO below which forming an FTA is welfare-improving. In examining external tariff reductions under FTA, we take into account the constrained conditions that optimal tariffs set by member countries effectively induce the intrabloc exporters to comply with RoO. This approach rules out trade regime switches and helps identify the economic determinants of establishing an effective and welfare-improving FTA with RoO. We further examine whether an FTA with RoO increases total trade or whether the extra trade arises at the expense of nonmembers. Our simple model has implications for economic factors that foster or impede regional economic integration under imperfect completion.