Working Papers Series
Papers below are in pdf.
David Mandy
WP 08-02
Population Movements in the Presence of Agglomeration and Congestion Effects: Local Policy and the Social Optimum
David M. Mandy, Peter R. Mueser & Eric Parsons
We investigate the efficiency properties of population mobility when localities compete in an environment with local amenities and local externalities. Our model is dynamic, incorporating land and labor markets in a context where firms and workers form rational expectations. Concern focuses on whether and under what conditions the substantive conclusions from static models can be reinterpreted to apply in a dynamic context where moving is costly. In the spirit of Tiebout (1956), it can be shown in static models that taxes or subsidies developed by each local jurisdiction representing the interests of landowners can induce an efficient population allocation even in the presence of local externalities. We show that, in a dynamic model, efficiency of mobility requires that localities represent the interests of other local stakeholders, including residents and firms, as well as landowners. There may be multiple sets of equilibrium flows corresponding with alternative expectations. We consider institutional arrangements that may facilitate preferred paths.
JEL Codes: H21, J61
Keywords: geographic mobility, optimal population distribution
WP 07-01
When Do Input Prices Matter For Make-Or-Buy Decisions?
David Mandy
We investigate input pricing regimes that induce efficient make-or-buy decisions by entrants when there is constant returns in the production of the input(s) and simultaneous noncooperative price competition in downstream retail markets. A necessary and sufficient condition for efficient make-or-buy decisions is derived. This condition shows that input prices are relevant for make-or-buy decisions except under restrictive and often unverifiable assumptions on the demand structure, and that the least informationally-demanding way to ensure efficient make-or-buy decisions is to price inputs at marginal cost. The extent to which input prices can depart from marginal cost while still inducing efficient make-or-buy decisions depends on the relative efficiency of the incumbent and the demand displacement ratio, with significant departures possible even for modest efficiency differences when products are nearly homogeneous.
JEL Codes: G15, F31, F34
Keywords: Input Pricing Policy, Productive Efficiency
forthcoming in Journal of Regulatory Economics
WP 04-05
Exact FGLS Asymptotics for MA Errors
David Mandy and Sandor Fridli
We show under very parsimonious assumptions that FGLS and GLS are asymptotically equivalent when errors follow an invertible MA(1) process. Although the linear regression model with MA errors has been studied for many years, asymptotic equivalence of FGLS and GLS has never been established for this model. We do not require anything beyond a finite second moment of the conditional white noise, uniformly bounded fourth moments and independence of the regressor vectors, consistency of the estimator for the MA parameter, and a finite nonsingular probability limit for the (transformed) averages of the regressors. These assumptions are analogous to assumptions typically used to prove asymptotic equivalence of FGLS and GLS in SUR models, models with AR(p) errors, and models of parametric heteroscedasticity.
JEL Codes: L5
Keywords: Moving Average, Generalized Least Squares, Asymptotic Distribution.
WP 04-04
Incentives for Sabotage in Vertically Related Industries
David Mandy and David E. M. Sappington
We show that the incentives a vertically integrated supplier may have to disadvantage or "sabotage" the activities of downstream rivals vary with both the type of sabotage and the nature of downstream competition. Cost-increasing sabotage is typically profitable under both Cournot and Bertrand competition. In contrast, demand-reducing sabotage is often profitable under Cournot competition, but unprofitable under Bertrand competition. Incentives for sabotage can vary non-monotonically with the degree of product differentiation.
JEL Codes: C1
Keywords: Regulation, Vertical Integration, Access Pricing, Sabotage
Published in revised form in The Journal of Regulatory Economics (June 2007)
WP 01-13
Access Price and Vertical Control Policies for a Vertically Integrated Upstream Monopolist when Sabotage is Costly
David Mandy & George Chikhladze
Input price and novel vertical control regulations are derived for a vertically integrated upstream monopolist when the monopolist can engage in non-price discrimination against a downstream rival. The paper extends the literature on sabotage in network industries by characterizing welfare-optimal regulatory policy with a realistic set of policy tools when sabotage can be undertaken, at a cost, by a monopoly access provider who also competes in a di erentiated products Bertrand retail duopoly. Welfare optimal regulation balances the con icting goals of reducing non-price discrimination and stimulating ecient production levels downstream. The regulator can induce the rst best in limited cases when the downstream rival is ecient relative to the downstream aliate of the monopoly access provider, non-price discrimination by the integrated monopolist is suciently costly and downstream competition is not too intense. Otherwise, the regulator faces a trade-o between reducing the double markup problem by pricing access low while imposing restrictions on the control the monopoly input provider can exercise over its retail aliate, versus pricing access high and allowing unrestricted vertical control within the vertically integrated rm in order to deter non-price discrimination. Discrimination costs and competition intensity determine which policy is optimal.
Keywords: Regulation, Vertical integration, Non-price discrimination, Sabotage
JEL Codes: L42, L43, L51
WP 01-11
TELRIC Pricing with Vintage Capital
David Mandy
This paper studies the effect of technical progress on competitive equilibrium prices in a formal dynamic setting that includes the dynamic effects of business income taxes. The model is designed to facilitate comparison between competitive equilibrium prices and the TELRIC prices that were recently adopted by the FCC for determining universal service subsidies in telecommunications. The equilibrium prices differ from the regulatory prices due to 1) differences in discount factors, 2) differences in the stream of operating costs, and 3) differences in the discounting method applied to the revenue stream. In a calibrated comparison of prices for end-office switching services, we find that the last difference is the most important, and the net effect of these differences is regulated prices that understate competitive equilibrium prices by billions of dollars nationwide in present value terms. We also note that equilibrium prices can be derived without making any assumptions about depreciation methods, contrary to conventional regulatory practice, and that competitive prices cannot be calculated in advance of costs once capital utilization is endogenized.
Published in revised form in the Journal of Regulatory Economics, 22/3 (November 2002), pp. 215-249.