Helsinki Center of Economic Research (HECER) discussion papers

 

ISSN 1795-0562

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  • Kanniainen, Vesa; Lehtonen, Juha-Matti (HECER, Helsinki Center of Economic Research, 2018)
    HECER, Discussion Paper No. 427
    Economic benefits of joint procurement arise from increased bargaining power relative to the contractor and from economies of scale in production. There is, however, a puzzle: why are such procurements so few? This paper introduces a bargaining model with forward-looking expectations about the scale of delivery contracts. It is shown that the price sensitivity of the scale of acquisition is favourable for the buying partnership as it tends to depress the bargaining price. Several explanations are proposed for why it is hard to align the buyers’ incentives. First, the preferences concerning the properties of the products are country- specific with divergent implications for national security. Second, a country with a low valuation of the product has more bargaining power than a country with a high valuation and may expect a side payment from the partner of the procurement, while the latter may not have sufficient incentives to pay. Third, the gains from cooperative procurement in terms of economies of scale for the producer may not be sufficient to compensate for the conflicting preferences among the contractors. Fourth, while the future unpredictability of technologies or the future risks of deteriorating national security might support longer-term joint procurements, short-term opportunism tends to prevent long-term commitments.
  • Kanniainen, Vesa (HECER, Helsinki Center of Economic Research, 2018)
    HECER, Discussion Paper No. 426
    The paper shows that a defending army, particularly a small one, can fight hard when attacked by a predator. The result arises in the commitment equilibrium of a model with intergenerational altruism. By implication, the paper offers a novel theory of deterrence and defence policy. It shows that in the absence of informational constraints, there is a unique army size that is sufficient for deterrence. Under informational restrictions, a pooling equilibrium may exist where a victim with strong intergenerational altruism overinvests in its army, while the victim with a more limited altruism free rides on the information gap of the predator and builds a smaller army. Conditions for the existence of a separating equilibrium are established in terms of the cost of war. It turns out that the optimal defence policy need not satisfy the deterrence requirement. The case of separating equilibrium helps to explain why wars exist in equilibrium.
  • Kanniainen, Vesa (HECER, Helsinki Center of Economic Research, 2018)
    HECER, Discussion Paper No. 425
    Consumer boycotts help in supporting established social norms. Their effectiveness as a disciplinary mechanism in guiding corporate ethics has, however, been questioned. The paper considers three unexplored mechanisms, pointing to a more optimistic view, i.e. a group identity effect, anticipatory effects, and a firm size effect in global markets. The first set of results is related to the need of people to belong to groups with a social mission. It is shown that powerful cascade effects arise on the industry structure in equilibrium when the group dependency dominates among consumers. Less dramatic cascades arise with more independent consumers in the formation of ethical values as opportunist free riding becomes an option. Second, the development of modern information technology facilitates efficient monitoring of corporate ethics of large global firms resulting in potentially efficient means of disciplining. By implication, the consumer boycotts can lead to the evolution of the industry structures in favour of large firms. Success of consumers’ impact is, however, hard to test as firms can ex ante anticipate the risk of becoming the subject of a boycott if caught.
  • Kanniainen, Vesa (HECER, Helsinki Center of Economic Research, 2018)
    HECER, Discussion Paper No. 424
    Cyber technology represents digital military capability with the purpose of causing damage to the military strength of a potential enemy. War using conventional weapons may be preceded by or combined with a strike using cyber technology. This paper introduces such technology into the theory of conflicts. The cost of war relative to the payoff from victory turns out to be crucial for the results on armament decisions. In the war game, two types of Nash equilibria both subject to warfare are possible depending on the perceived cost of war. In a symmetric war game with equal cyber capabilities and a low cost of war, hostile countries choose to invest an equal amount of resources in their militaries. A higher cost of war leads to increased armament. However, asymmetric access to cyber technology limits the international arms race with conventional weapons when the cost of war is small while it - again - intensifies the arms race when the cost of war is greater. In all cases, access to cyber technology makes wars with conventional weapons more likely. Heterogeneity in the success of cyber programs creates a first-mover advantage for a superior country in terms of a possibility for a pre-emptive strike.
  • Lanne, Markku (HECER, Helsinki Center of Economic Research, 2018)
    HECER, Discussion Paper No. 423
    We consider estimation of the structural vector autoregression (SVAR) by the generalized method of moments (GMM). Given non-Gaussian errors and a suitable set of moment conditions, containing a sufficient number of relevant co-kurtosis conditions, the GMM estimator is shown to achieve global identification of the parameters of the SVAR model up to changing the signs of the structural shocks. We also propose a procedure, based on well-known moment selection criteria, to find the optimal set of moment conditions among the sets that guarantee identification. According to simulation results, the finite-sample performance of our estimation method is comparable, or even superior to that of the recently proposed pseudo maximum likelihood estimators. The two-step estimator is found to outperform the alternative GMM estimators. An empirical application to a small macroeconomic model estimated on postwar U.S. data illustrates the use of the methods. JEL Classification: C32 Keywords: structural VAR model, non-Gaussian time series, generalized method of moments
  • Koerselman, Kristian; Salonen, Mikko A.A. (HECER, Helsinki Center of Economic Research, 2018)
    HECER, Discussion Paper No. 422
    Abstract We study the determinants of the size of the core in the school choice problem using three years of data from a large higher education application clearinghouse. The clearinghouse uses a variation of the college-optimal stable mechanism (COSM) to assign applicants to slots in Finnish polytechnics. If the core is large, switching to a student-optimal stable mechanism (SOSM) could yield large improvements for applicants at a cost to schools. We however find that the core is either a singleton or very small each year. This suggests that the student/school trade-off is relatively unimportant within the set of stable matchings in Finnish polytechnic assignments. We show that the similarity of COSM and SOSM matchings is due to correlated school priorities, differing numbers of students and slots, and to students only applying to a small number of programs each. Because these properties are common to other higher education school choice problems, our conclusions are likely to generalize. In spite of the fact that Finnish polytechnics jointly only accept a third of applicants, accepted applicants' average matriculation exam grades are not much better than those of the median applicant. We attribute this to the low effective number of programs applied to, and suggest that details in the design of the application process affect the trade-off in match quality. JEL Classification: C78, D82, C71 Keywords: school choice, singleton core, deferred acceptance, match quality
  • Virrankoski, Juha (Helsinki Center of Economic Research, 2017)
    HECER Discussion Paper No. 421
    I study a dynamic labor market with homogenous firms and workers. Both types of agents choose between a centralized market and a decentralized search market. Firms have free entry and exit. I consider how bargaining and wage posting in the two types of market affect the equilibrium outcome. For example, if there is bargaining in the centralized market and wage posting in the search market, there exists a centralized market equilibrium, a decentralized market equilibrium, and a mixed market equilibrium where there are agents in both submarkets. If wages are posted in both markets, a search market equilibrium does not exist.
  • Meitz, Mika; Saikkonen, Pentti (Helsinki Center of Economic Research, 2017)
    HECER Discussion Paper No. 420
    Testing for regime switching when the regime switching probabilities are specified either as constants (‘mixture models’) or are governed by a finite-state Markov chain (‘Markov switching models’) are long-standing problems that have also attracted recent interest. This paper considers testing for regime switching when the regime switching probabilities are time-varying and depend on observed data (‘observation-dependent regime switching’). Specifically, we consider the likelihood ratio test for observation-dependent regime switching in mixture autoregressive models. The testing problem is highly nonstandard, involving unidentified nuisance parameters under the null, parameters on the boundary, singular information matrices, and higher-order approximations of the log- likelihood. We derive the asymptotic null distribution of the likelihood ratio test statistic in a general mixture autoregressive setting using high-level conditions that allow for various forms of dependence of the regime switching probabilities on past observations, and we illustrate the theory using two particular mixture autoregressive models. The likelihood ratio test has a nonstandard asymptotic distribution that can easily be simulated, and Monte Carlo studies show the test to have satisfactory finite sample size and power properties.
  • Zhu, Min (HECER – Helsinki Center of Economic Research, 2017)
    HECER Discussion Paper No. 419
    I investigate how Chinese exporters respond to market-specific tariff shocks that arise from US antidumping measures. Using Chinese customs data between 2000 and 2006, I find strong evidence that antidumping measures severely distort bilateral trade flows between China and the US. I also provide some evidence that the US import restrictions lead to a reduction in Chinese exports to alternative markets. I then investigate the underlying mechanism at the firm level. I document that Chinese firms that were hit with antidumping measures are less likely to export the targeted products across destinations. More importantly, antidumping measures are associated with spillovers across products within firms. That is, multi-product firms tend to switch exports to other unaffected products in alternative markets.
  • Nelimarkka, Jaakko (HECER – Helsinki Center of Economic Research, 2017)
    HECER Discussion Paper No. 418
    Fiscal foresight, economic agents receiving information about future fiscal policy, affects the consistency of results about the causal effects of government spending. This study explores the propagation of government spending shocks using a noncausal VAR model that allows for anticipation of exogenous fiscal policy changes. Overcoming the issue of insufficient information, the government spending shock is extracted from an anticipated error term by using institutional information about the conduct of fiscal policy. In addition, the approach nests the conventional causal structural VAR as a special case. In the U.S. economy, the identified spending shock comoves with defence expenditures. The shock increases consumption, employment and output one and a half years prior to its materialisation in government spending. After the shock arrives, real wages respond positively while investment turns negative. The estimated fiscal multiplier is close to unity.
  • Niemeläinen, Julia (HECER, Helsinki Center of Economic Research, 2017)
    HECER, Discussion Paper, No. 417
    This paper uses a life-cycle model to study the role of population ageing and the low level of pension income in retirement as drivers of China's persistent trade surplus vis-a-vis the United States. In the model, the fast increase in life expectancy coupled with the relatively low pension expenditures can help to explain its high savings, the persistent trade surplus and the accumulation of a sizeable net foreign asset position. The model predicts a positive net foreign asset position and trade balance for China for most years in the simulation period even though China's high productivity growth has a strong negative impact on its trade balance.
  • Nyholm, Juho (HECER, Helsinki Center of Economic Research, 2017)
    HECER, Discussion Paper No. 416
    This paper proposes two residual-based diagnostic tests for noninvertible ARMA models. The tests are analogous to the portmanteau tests developed by Box and Pierce (1970), Ljung and Box (1978) and McLeod and Li (1983) in the conventional invertible case. We derive the asymptotic chi-squared distributions for the tests and study the size and power properties in a Monte Carlo simulation study. An empirical application employing financial time series data points out the usefulness of noninvertible ARMA model in analyzing stock returns and the use of the proposed test statistics.
  • Nelimarkka, Jaakko (HECER – Helsinki Center of Economic Research, 2017)
    HECER, Discussion Paper No. 415
    News shocks about future productivity can be correctly inferred from a conventional VAR model only if information contained in observables is rich enough. This paper examines news shocks by means of a noncausal VAR model that recovers economic shocks from both past and future variation. As noncausality is implied by nonfundamentalness, the model solves the problem of insufficient information per se. By the impulse responses derived from the model, variables react to the anticipated structural shocks, which are identified by exploiting future dependence of investment with respect to productivity. In the U.S. economy, news shocks move investment and stock prices on impact, but these responses are likely affected by a parallel increase in productivity. News shocks are characterised by gradual diffusion to productivity and generate smooth reactions of forward-looking variables.
  • Hämäläinen, Saara (HECER – Helsinki Center of Economic Research, 2017)
    HECER, Discussion Paper No. 414
    We consider a price search model with gradual information arrival and deadlines to study how consumers search within and across stores during a single search spell. This renders the effects of search costs smooth and allows us to endogenize the intensity of competition in a new way that avoids both Diamond and Bertrand paradoxes. Firms can commit to any choice complexity levels. They determine the relative numbers of informed and uninformed consumers, which equal in equilibrium. The outcome is thus halfway from Diamond and Bertrand equilibria. Wider price awareness and advertizing improves welfare by discouraging the prominent firm's obfuscation.
  • Lindblad, Annika (HECER, Helsinki Center of Economic Research, 2017)
    HECER, Discussion Paper No. 413