This paper develops a simple framework to analyze the links between corruption and the unofficial economy and their implications for the official economy. In a model of self-selection with heterogeneous entrepreneurs, we show that the entrepreneurs' option to flee to the underground economy constrains a corrupt official's ability to introduce distortions to the economy for private gains. The unofficial economy thus mitigates government-induced distortions and, as a result, leads to enhanced economic activities in the official sector. In this sense, the presence of the unofficial sector acts as a complement to the official economy rather than a substitute.JEL Classification: D9, H2, K4, L1.
The idea that an incumbent supplier may tie two complementary products to fend off potential entrants is popular among practitioners yet is not fully understood in formal economic theory. This paper makes sense of the argument by formally deriving a dynamic version of the old leverage doctrine. It is shown that when an incumbent monopolist faces the threat of entry in all complementary components, tying may make the prospects of successful entry less certain, discouraging rivals from investing and innovating. Tie-in sales may reduce consumer and total economic welfare.
This article analyzes the effects of net neutrality regulation on investment incentives for Internet service providers (ISPs) and content providers (CPs), and their implications for social welfare. Concerning the ISPs' investment incentives, we find that capacity expansion decreases the sale price of the priority right under the discriminatory regime. Thus, contrary to ISPs' claims that net neutrality regulations would have a chilling effect on their incentive to invest, we cannot dismiss the possibility of the opposite. A discriminatory regime can also weaken CPs' investment incentives because of CPs' concern that the ISP would expropriate some of the investment benefits.
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