Working papers results

This paper presents a simple model of imperfect labor markets with endogenous labor market participation and home production. We show that a two-sector economy (home and market) implies a three-state labor market when labor market imperfections take the form of an irreversible entry cost incurred by workers. This simple framework brings several results. First, it delivers an expression for the employment rate and as side-products, a measure of the unemployment rate and the size of the labour force. Second, it rationalizes several empirical works on the definition of unemployment in labor force surveys. Third, it derives endogenously all flows between three labour market states. Fourth, a calibration of the model rationalizes di.erences in employment rates: in the US., we find a market productivity premium of +30% and market frictions of -15% compared to France. Finally, the model is a very simple reduced form of search models with which it is fully consistent: the irreversible entry cost is the opportunity cost of search and depends on aggregate conditions.

The existing literature ignores the fact that in most European countries the
strictness of Employment Protection Legislation (EPL) varies across the firm size
distribution. In Italy firms are obliged to rehire an unfairly dismissed worker only
if they employ more than 15 employees. Theoretically, the paper solves a
baseline model of EPL with threshold effects, and shows that firms close to the
threshold are characterized by an increase in inaction and by a reluctance to
grow. Empirically, the paper estimates transition probability matrices on firm
level employment using a longitudinal data set based on Italian Social Security
(INPS) records, and finds two results. First, firms close to the 15 employees
threshold experience an increase in persistence of 1.5 percent with respect to a
baseline statistical model. Second, firms with 15 employees are more likely to
move backward than upward. Finally, the paper tests the effect of a 1990 reform
which tightened the regulation on individual dismissal only for small firms. It
finds that the persistence of small firms relative to large firms increased
significantly. Overall, these threshold effects are significant and robust, but
quantitatively small.

We consider a society that has to elect an official who provides a public service
for the citizens. Potential candidates differ in their competence and every potential
candidate has private information about his opportunity cost to perform the task
of the elected official. We develop a new citizen candidate model with a unique
equilibrium to analyze citizens' candidature decisions.
Under some weak additional assumptions, bad candidates run with a higher
probability than good ones, and for unattractive positions, good candidates freeride
on bad ones. We also analyze the comparative static effects of wage increases
and cost of running on the potential candidates' entry decisions.

This paper examines competition in a liberalized market, with reference to some key features of the natural gas industry. Each firm has a low (zero) marginal cost core capacity, due to long term contracts with take or pay obligations, and additional capacity at higher marginal costs. The market is decentralized and the firms decide which customers to serve, competing then in prices. We show that under both sequential and simultaneous entry, there is a strong incentive to segment the market: when take-or-pay obligations are still to be covered, entering and competing for the same customers implies low margins. If instead a firm is left as a monopolist on a fraction of the market,  xhausting its obligation, it has no further incentive to enter a second market, where the rival will be monopolist as well. Hence, we obtain entry without competition. Antitrust ceilings do not prevent such an outcome while a wholesale pool market induces generalized competition and low margins in the retail segment.

What is the future of social security systems in OECD countries? In our view, the answer
belongs to the realm of politics. We evaluate how political constraints shape the social
security system in six countries - France, Germany, Italy, Spain, the UK and the US -
under population aging. Two main aspects of the aging process are relevant to the
analysis. First, the increase in the dependency ratio - the ratio of retirees to workers
- reduces the average profitability of the unfunded social security system, thereby
inducing the agents to reduce the size of the system by substituting their claims
towards future pensions with more private savings. Second, an aging electorate leads
to larger systems, since it increases the relevance of pension spending on the
policy-makers' agenda. The overall assessment from our simulations is that the political
aspect dominates in all countries, albeit with some differences. Spain, the fastest aging
country, faces the largest increase in the social security contribution rate. When labor
market considerations are introduced, the political effect still dominates, but it is less
sizeable. Country specific characteristics (not accounted for in our simulations), such as
the degree of redistribution in the pension system and the existence of family ties in
the society, may also matter. Our simulations deliver a strong policy implication: an
increase in the effective retirement age always decreases the size of the system chosen
by the voters, while often increasing its generosity. Finally, delegation of pension policy
to the EC may reduce political accountability and hence help to reform the systems.

We offer a simple explanation for oligopolistic reaction based on Bayesian learning by
rival firms operating in an uncertain environment. We test the implications of the model
through a discrete choice panel data sample of MNEs that have invested in Central and
Eastern Europe over the period 1990-1997. Interacting the measure of rivals investment
in country-industry pairs with uncertainty we find strong evidence for oligopolistic reaction,
especially through the channel of Bayesian learning postulated by the model. The
findings are robust with respect to different model specifications.

This paper presents firm-level evidence on the dynamics of the relative demand for non-manual workers in Italian manufacturing during the 1990s. The analysis provides a number of interesting results. First, the rise within firms in the share of non manual workers in both employment and hours worked (within-firm skill upgrading) is the main determinant of the increase in the relative demand for skilled workers. By contrast, demand changes associated to trade have mitigated such a rise by shifting employment away from skill-intensive firms. Second, while the relative number of hours worked by skilled workers within firms has risen, the hourly wage premium has fallen. Third, within-firm skill upgrading is strongly and signi cantly related to investment in computers and R&D. Fourth, we find that technical progress has raised the relative productivity of skilled workers (the skill-bias of technical progress is positive). Finally we show that the standard approach that measures annual, rather than hourly relative wages, produces a downward bias in the estimate of the skill-bias of technical progress.

We present a dynamic comparative advantage model in which moderate reductions in
trade costs can generate sizable increases in trade volumes over time. A fall in trade
costs has two e.ects on the volume of trade. First, for given factor endowments, it
raises the degree of specialization of countries, leading to a larger volume of trade
in the short run. Second, it raises the factor price of each country's abundant
production factor, leading to diverging paths of relative factor endowments across
countries and a rising degree of specialization. A simulation exercise shows that
a fall in trade costs over time produces a non-linear increase in the trade share of
output as in the data. Even when elasticities of substitution are not particularly
high, moderate reductions in trade costs lead to large trade volumes over time.

Employees of "globalized" firms face a riskier, but potentially more rewarding,
menu of labor market outcomes. We document this neglected trade-off of
globalization for a sample of Indian manufacturing firms. On the one hand,
the employees of firms subject to foreign competition face a more uncertain
stream of earnings and riskier employment prospects. On the other, they enjoy
a more rapid career and/or have more opportunities to train and upgrade
their skills. The negative uncertainty costs and the positive incentive effects
of globalization are thus twin to each other. Concentrating on just one side
of the coin gives a misleading picture of globalization.

We document the presence of a trade-off between unemployment benefits (UB) and
employment protection legislation (EPL) in the provision of insurance against labour
market risk. The mix of quantity restrictions and price regulations adopted by the
various countries would seem to correspond to a stable politico-economic equilibrium.
We develop a model in which voters are required to cast a ballot over the strictness of
EPL and over the generosity of UB. Agents are heterogeneous along two dimensions:
employment status - there are insiders and outsiders - and skills - low and high skills.
We show that if there exists a majority of low-skill insiders, the voting game has a
politico-economic equilibrium with low UB and high EPL; otherwise, the equilibrium
features high UB and low EPL. Another testable implication of the model is that a
larger share of elderly workers increases the demand for EPL. Panel data on institutions
and on the age and educational structures of the populations are broadly in line with
our results. We also find that those favouring EPL over UB in a public opinion poll
carried in 2001 in Italy have precisely the same characteristics predicted by our model.