Uncertainty and International Migration: An Option-cum-Portfolio Model
with Shin-Hwan Chiang and Lieng Hua
Journal of Labor Research September, 2008
Abstract: Real option theory suggests that individual migration may be delayed beyond the Marshallian trigger since the option value to waiting may be sufficiently positive in the face of uncertainty. In this paper we present a model where a multi-member family is the decision- making unit. Therefore, migration may now be partly driven by the desire to diversify the location of family members in order to reduce income risk. Our two-period model incorporates both the option and the portfolio motive as the triggers determining family's optimum timing of migration. The optimum delay before migration is shown to depend on the uncertainty parameters of the model including risk aversion and income volatility. We use aggregate Canadian data on immigrant visa issuance and landing to capture average waiting period for migrants from Hong Kong.
[go to paper]

The Structure of Mixed Oligopoly under Uncertainty
with Syed Basher, and Shin-Hwan Chiang
The B.E. Journal of Theoretical Economics 7(1), Article 24, 2007
Abstract: In this paper we introduce product demand uncertainty in a mixed oligopoly model and reexamine the nature of sub-game perfect Nash equilibrium (SPNE) when firms decide in the first stage whether to lead or follow in the subsequent quantity-setting game. In the non-stochastic setting, Pal (1998) demonstrated that when a public firm competes with a domestic private firm, multiple equilibria exist but the efficient equilibrium outcome is for the public firm to follow. Matsumura (2003a) proved that when the public firm's rival is a foreign private firm, leadership of the public firm is both efficient as well as SPN equilibrium. Our stochastic model shows that when the leader must commit to output before the resolution of uncertainty, multiple SPNE is possible. Whether the equilibrium outcome is public or private leadership hinges upon the degree of privatization and market volatility. More importantly, Pareto-inefficient simultaneous production is a likely SPNE. Our results are driven by the fact that the resolution of uncertainty enhances the profits of the follower firm in a manner that is well known in real option theory.
[go to paper]

Rural-Urban Migration of Family Labor: A Portfolio Model
with Shin-Hwan Chiang
The Journal of International Trade and Economic Development , 16(3), September 2007, 325-335
Abstract: In this paper we develop a family-based rural to urban migration model and offer an alternative explanation of urban underemployment to the well-known Harris-Todaro (H-T) model. We assume that the risk-averse family allocated its members to the rural, urban formal and urban informal sectors so as to maximize the expected family utility. Rural and urban informal sector incomes are assumed to be stochastic and potentially correlated creating an incentive for families to place members in the urban informal sector to reduce the variance of aggregate income. The spatial allocation or migration problem thus coincides with the portfolio choice model in finance. A major finding of the paper is that conventional policy wisdom, derived from the individualistic, expected-income maximizing H-T model no longer holds true in the family-based 'portfolio' migration model.
[go to paper]

Price Discrimination and Social Welfare with Correlated Demand
with Shin-Hwan Chiang
Journal of Economic Behavior and Organization 61(1), September 2006, 110-122
Abstract: The paper analyzes the price, output and welfare effects of third-degree price discrimination triggered by the portfolio motive of a risk-averse monopolist facing random and potentially correlated market demands. It is shown that contrary to conventional wisdom, price discrimination can occur with identical expected demands, the relatively inelastic but risky market may be charged the lower price, and despite linear demands, aggregate expected output may fall while expected consumer and producer surplus may rise. These results are shown to be driven by the risk aversion of the monopolist and the asymmetry in the risk and revenue characteristics of the markets.
[go to paper]