CEGE - Working Papers / Preprints
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- The amazing geometry of price competition with quality dependent production costsPublication . Pires, Cesaltina Pacheco; Pinho, Joana; Jorge, Sílvia Ferreira; Catalão-Lopes, MargaridaThis paper provides a full characterization of price competition in a vertical differentiation model with quality dependent marginal production costs. For each vector of qualities, we determine the Nash equilibrium and show graphically the different market regions for different values of the lowest quality valuation parameter, which reveals an amazing geometry. Besides the classical cases of high-quality monopoly or duopoly with partial or full coverage, we show that, when the high-quality firm has a too high quality, the equilibrium is a low-quality monopoly. Moreover, for positive lowest quality valuation, there always exist interior and corner full coverage duopoly equilibria. On the contrary, partial coverage duopoly do not exist when the lowest consumers’ valuation of quality is high whereas high-quality monopoly are not possible for low values of lowest quality valuation. Our findings are the backbone of future analysis of quality choices and may be relevant for firms and policy makers.
- Are covered bonds different from securitization bonds?Publication . Pinto, João; Correia, MafaldaUsing a sample of 18,309 bonds issued by European banks, we show that although ratings are the most important pricing determinant for ABS and MBS, investors place relatively more importance on contractual, macroeconomic, and banks’ characteristics rather than ratings in pricing covered bonds. We find evidence of a mispricing effect in structured finance markets: ABS and MBS have higher credit spreads than similarly rated public covered bonds (PCB) and mortgage covered bonds (MCB), and security prices reflect information beyond credit ratings across asset classes. We find no evidence of borrowing costs affecting the banks’ choice between securitization and covered bonds.
- Barriers to social innovationPublication . Mendes, Américo M. S. Carvalho; Batista, António; Fernandes, Liliana; Macedo, Palmira; Pinto, Filipe; Rebelo, Luis; Ribeiro, Marta; Sottomayor, Miguel; Tavares, Marisa; Verdelho, VítorA deliverable of the project: “The theoretical, empirical and policy foundations for building social innovation in Europe
- Business model diversity and banking sector resiliencePublication . Marques, Bernardo P.; Alves, Carlos F.What is the impact of the diversity of business models operating in a banking sector and its resilience? Literature offers mixed predictions: while one strand of literature puts emphasis on the virtues of diversity due to lower contagion, an opposing strand suggests that nudging banks to choose diverse diversification strategies (which tend to be individually sub-optimal) may be ‘a worse remedy than the disease’. This paper provides several contributions to this discussion: (i) the development of a two-step measure of business model diversity, based on the application of clustering techniques on a set of business model variables at the bank level, followed by their aggregation at the country level, (ii) the specification of a 3SLS model that explicitly considers the interactions of business model diversity with diversification and market power in explaining banking sector resilience, (iii) the breakdown of the baseline results per type of financial system (i.e. bank vs market-based), and (iv) the analysis of the diversity and composition of optimal country-level portfolios of banking business models. In general, our results suggest that more resilient banking sectors tend to be more diverse (i.e., assets are well distributed across different bank types), less revenue diversified and exhibit more market power than less resilient ones. Additionally, a deeper dive tells us that such relationship between diversity and resilience seems to occur chiefly in market-based systems. Finally, the analysis of efficient portfolios confirms that a similar level of diversity may induce different resilience responses according to the type of financial system, which we attribute to the ‘ecosystem’ of each type of financial system. Our results are robust to changes to the original model specification, proxies for dependent and independent variables, and sample composition.
- Contracting out public transit services: an incentive performance-based approachPublication . Pinto, João; Santos, Mário C.; Matos, Pedro VergaThe literature on public transit services contracting, emphasizes the need of efficient contracting designs to promote parties’ interest alignment. There is, however, limited research addressing specific incentive mechanisms. The paper contributes to that literature by developing a performance-based model with an embedded incentive bonus/malus (B/M) mechanism for contracting out transit services. Monte Carlo simulation documents that model’s performance appears sensitive to stochastic specification of some of the B/M drivers, and responsive to changes in the contractual performance factors out of the sub-concessionaire’s control. Evidence on the operation of a light-rail transit system designed based on a version of the model, document that it may contribute to promote ridership patronage, increase the average ride, and ultimately promote the economic operating efficiency of the system. Some policy implications are drawn, namely in terms of public funds allocative efficiency, and promotion of social welfare in contracting transit services.
- A counting multidimensional innovation index for SMEsPublication . Pereira, Nuno Campos; Araújo, Nuno; Costa, LeonardoWe developed a C ounting Multidimensional Innovation Index (MII) framework for measuring and benchmarking innovation of Small and Medium Enterprises (SMEs) , groups of SMEs, industries , regions, and countries . The methodology behind the MII is similar to the methodology behind the United Nations Multi dimensional Poverty Index and follows the innovation definitions stipulated by the OECD Oslo Manual , cover ing dime n s ions and partial indicators suggested by this Ma nual and/or adapted from the In novation Union Scoreboard (IUS) and from the Global Innovation Index (GII) . T o illustrate the MII framework , a survey was conducted among SME s of the metalworking industry in Portugal .
- Debt financing choices: theory and evidence from EuropePublication . Pinto, João; Santos, Mário C.We examine the factors that influence borrower’s choice between structured finance (SF) and straight debt finance (SDF). Using a sample of 12,075 Western European loans and bonds issued between 2000 and 2011, we find that borrowers choose SF when they seek long-term financing and funding cost reduction. Our results document that floatation costs, information asymmetry, and renegotiation and liquidation risks affect non-financial firms’ financing decisions. We also find that banks choose securitization to raise relatively large amounts of debt and improve economic performance. Our overall findings support hypotheses of SF as mechanism for asymmetric information problem and principal-agent conflict reduction.
- Education, spatial disparities in schooling and black-white interracial marriagePublication . Gevrek, Zahide Eylem; Gevrek, DenizThis study investigates the observed positive relationship between educational attainment and likelihood of black-white interracial marriages. Different from the previous studies that focus only on the role of individual education levels in interracial marriages, this study contributes to the literature by examining the impact of the spatial variations in relative black/white educational distributions in marriage markets. The first contribution of this study is to provide an answer to the low black-white intermarriage rate puzzle by suggesting that as black and white educational differences in general between lessen and as individual educational attainment increase black-white interracial marriages may not become more common. The relative importance of three mechanisms through which education may affect intermarriage probability is examined: (1) racial adaptability effect, (2) enclave effect, and (3) educational dissimilarity effect. Using the U.S. Census Data, this study's second contribution is the finding that the enclave and the educational dissimilarity effects are more important than the racial adaptability effect in explaining intermarriage probability of black males. Our results suggest that rising black individual educational attainments may not always result in an increased intermarriage likelihood. Differences in the black and white education distributions have a significant impact on the black/white interracial marriage probability.
- Endogenous product design and quality when consumers have heterogeneous limited attentionPublication . Cunha, Mariana; Osório C., António M.; Ribeiro, Ricardo M.In some markets, consumers do not know the attributes of all the products that are available in the market, or the prices at which they are offered. To reduce this uncertainty consumers may, at a cost, gather and process information about the attributes and prices of the different products. The uncertainty that persists at the time of purchase affects the competition in the market, via product attributes and prices. We examine the consequences of information costs on firms' product multi-attribute and pricing decisions when consumers have heterogeneous information costs and limited attention. We find that consumers that can gather and process information at approximately no cost rationally select to be attentive while consumers that must incur a cost rationally select to be inattentive. We find also that firms have an incentive to respond to lower information costs by increasing differentiation, but solely along the least-costly attribute dimension and if the proportion of attentive consumers in the market is small. This implies that, as information costs decrease, equilibrium prices may increase in some markets and decrease in others. Further, it implies also that when the cost of an attribute dimension in a market changes, there can be radical shifts in product attributes.
- Endogenous product design and quality with rationally inattentive consumersPublication . Cunha, Mariana; Osório, António; Ribeiro, Ricardon some markets, consumers do not know the attributes of all the products that are available in the market, or the prices at which they are offered. To overcome this uncertainty, consumers may gather and process information about those attributes and prices. In this paper, we examine the consequences of consumer costs of doing so on firms product attribute and pricing decisions. To do so, we follow the rational inattention literature in assuming that, before entering the choice situation, consumers are in contact with all products, but may have an incomplete or imprecise prior idea about their attributes and prices. Further, we also assume that consumers can, at a cost, gather and process information in a non-random fashion about any (sub)set of products, with any precision about their attributes and prices. Furthermore, we assume that products are characterized by both horizontal and vertically differentiated attributes, which we address as design and quality, respectively. We find a number of interesting results. First, if the unit costs of gathering and processing information are homogeneous among consumers, firm' should differentiate their products as those costs fall, so to relax the otherwise increasing price competition. This implies that equilibrium prices may increase as these costs decrease, because product differentiation countervails the otherwise negative impact on prices. Second, if the unit costs of gathering and processing information are heterogeneous among consumers, with a sizeable proportion of "informed" consumers, firms should always seek to differentiate their products as maximum as possible, independently of the level of information costs of the "uninformed" consumers. This implies that equilibrium price levels do not increase (and, in fact, tend to decrease) as the unit costs of those consumers decrease and that "informed" consumers serve as a "market competition guardian". Finally, in all the above cases, firms do not need to differentiate themselves along all attribute dimensions. Differentiation along one attribute dimension is more than enough to relax price competition.