Lourdes Moreno
email: lmoreno@ccee.ucm.es

Martín Diego

Rodríguez Rodríguez

Lourdes Moreno Martín

Export activity, persistence and mark-ups*

Keywords: Economies &lt, F1 -Trade &lt, F -International Economics, L13 -Oligopoly and Other Imperfect Markets &lt, L1 -Market Structure, Firm Strategy, and Market Performance &lt, L -Industrial Organization, L60 -General &lt, L6 -Industry Studies: Manufacturing &lt, L -Industrial Organization export , margin JEL Classification Numbers: F12, L60, L13

Export activity, persistence and mark-ups

Introduction

A large bulk of work has recently analyzed the effect of export activity on firm productivity. That research supports a clear conclusion: exporters enjoy efficiency advantages over non-exporters. This literature found a strong theoretical support in [START_REF] Melitz | The impact of trade on intra-industry reallocations and aggregate industry productivity[END_REF] paper, which stimulated an increasing literature about the characteristics of international activity in the presence of firm heterogeneity. Given this evidence, a further step would be to ask whether such productivity differences are passed through to profit advantages. However, much less effort has been devoted to analyze the impact of export activity on margins. Some recent papers have considered factors that can explain differences in mark-ups across firms related to export activity. In particular, [START_REF] Melitz | Market Size, Trade, and Productivity[END_REF] analyze selection and pro-competition effects of trade on mark-ups.

Several studies have introduced foreign trade as an explanatory variable of margins. In the case of imports, results suggest a negative effect on total profitability of domestic firms, though collusive behavior between domestic and foreign firms could reduce this effect 1 . Recent evidence also suggests that outsourcing strategies, since they stimulate an increase in trade of intermediate goods, may counteract the effect of imports as suggested by the market discipline hypothesis [START_REF] Egger | On the Relationship Between International Outsourcing and Price-cost Margins in European Industries[END_REF]. With respect to export activity several papers have used aggregate data, where average margins across industries -approached through an accounting measure -are explained, among other variables, by an indicator of export behavior. Though there are several reasons to believe that exports could affect margins, results are far from being conclusive. In particular, [START_REF] Caves | Competition in the Open Economy: A Model Applied to Canada[END_REF], [START_REF] Geroski | Simultaneous equations models of the structure-performance paradigm[END_REF] and Stalhammar 1 Tybout (2001) surveys the theoretical link between imports and domestic mark-ups and summarizes the empirical .../... The objective of this paper is to analyze whether there are differences in margins for different groups of firms according to their export activity. We follow the methodology proposed by [START_REF] Bernstein | Price-Cost Margins, Exports and Productivity growth: with an Application to Canadian Industries[END_REF], based on a structural specification which comprises a translog cost function, a variable factor share equation and a price-cost margin equation. Firm margins are parameterised taking into account the degree of persistence of export activity.

Specifically, we distinguish among non-exporters, entrants, exiters, switchers (firms that enter or exit more than once throughout the period) and persistent exporters.

This theoretical benchmark is applied to a panel of Spanish manufacturing firms for the period 1990-99. The evolution of the economic cycle and strong changes in the exchange rate system throughout that period should have affected the competitive position of exporters vs non exporters. The dataset allows us to analyze not only the differences in margins related to export and domestic activities, but also to know how market evolution affected both margins. The rest of the paper is as follows. Section 2 provides some insights about potential effects of export activity on margins. Section 3 explains the theoretical benchmark, both in a unimarket and multimarket context. Section 4 describes the data source and provides a descriptive approach in order to infer the relationship between margin and export activity. Section 5 gives the results of the estimates and, finally, main conclusions are summarized in Section 6.

Export activity and mark-ups

Though since mid-nineties several papers highlighted the relationship between productivity and export activity, it was not until recent years that the literature has provided a strong theoretical support. In that sense, [START_REF] Melitz | The impact of trade on intra-industry reallocations and aggregate industry productivity[END_REF] paper could be considered as a main The empirical evidence obtains that exporting firms are more efficient than nonexporters. It mostly supports the self-selection hypothesis, that stresses the idea that export markets select the most efficient firms due to the presence of higher sunk costs related to entry in foreign markets. See for example, Aw et al (1997) for Taiwan, [START_REF] Roberts | The decision to export in Colombia: An Empirical Model of Entry with Sunk Costs[END_REF] for

Columbia, [START_REF] Bernard | Exceptional exporter performance: cause, effect, or both?[END_REF] for the United States and Delgado et al (2002) for Spain 2 .

A complementary explanation is based on the learning hypothesis, which suggests that export activity induces productivity improvements. The main empirical distinction between both arguments is that while productivity differentials are ex-ante to firm entry in the selection explanation, the learning hypothesis points out that firms which begin to export should increase their productivity with respect to other firms after entering export markets. In the last case, though some papers have found some support (e.g., [START_REF] Girma | Does exporting increase productivity? A Microeconometric Analysis of Matched Firms[END_REF]), the empirical evidence is not conclusive.

Most papers have focused on the relationship between export and productivity, but there 2 [START_REF] Wagner | Exports and Productivity: A Survey of the Evidence from Firm-level Data[END_REF] provides an extensive survey of microeconomic studies. is very scarce research about margins. In [START_REF] Melitz | The impact of trade on intra-industry reallocations and aggregate industry productivity[END_REF] the most productive firms export and have higher profits, but mark-ups are exogenous. It is due to he assumes monopolistic competition under CES preferences. This question has been issued by [START_REF] Melitz | Market Size, Trade, and Productivity[END_REF], who incorporate endogenous mark-ups considering a linear demand system with horizontal product differentiation developed by [START_REF] Ottaviano | Agglomeration and Trade Revisited[END_REF]. In their model there is an endogenous distribution of mark-ups across firms that respond to the toughness of market competition, measured by the number and the average productivity of competing firms. In the equilibrium at firm level, lower cost firms set lower prices and earn higher revenues and profits that firms with higher costs. However, they also set higher mark-ups given that they do not pass the entire cost differential to consumer prices. In the free entry equilibrium competition is tougher in larger markets, where more firms compete and average prices are lower. As in [START_REF] Melitz | The impact of trade on intra-industry reallocations and aggregate industry productivity[END_REF], trade increases average productivity by forcing least productive firms to exit. Nevertheless, it operates now through a different channel: the increased product market competition 3 . Firms respond to this tougher competition by setting a lower mark-up that outweighs the selection effect according to which the most productive firms survive and set higher mark-ups. [START_REF] Bernard | Plants and Productivity in International Trade[END_REF] also develop a model that also predicts endogeneous margins. They assume a Bertrand competition framework where mark-ups are variable and the differences in efficiency among firms can be observed throughout differences in productivity 4 . As in Melitz 3 Factor market competition plays no role in [START_REF] Melitz | Market Size, Trade, and Productivity[END_REF] because the supply of labour to the differentiated good sector is perfectly elastic.

4 Productivity (R) is the monetary translation of efficiency (Z), such as i i i R = P Z , where P i refers to output price.

Additionally, output price is defined as

= i i i w P M Z
, where w is the cost of an input bundle (firms are input price takers) and M i is the mark-up. With perfect competition M i = 1 and i R = w , reflecting that prices change inversely to efficiency changes. However, if M i is not equal to 1, differences in productivity can be observed.

.../... and [START_REF] Melitz | Market Size, Trade, and Productivity[END_REF], this model suggests that more efficient firms set a higher markup.

However, the analytical results imply, as consequence of the functional forms chosen, some surprising predictions, as they recognize. Specifically, the distribution of mark-ups is the same in any destination and does not depend on the level of technology or geographic barriers.

To analyze the relationship between export activity and margins is also suitable to consider the different conditions of trade in world markets in relation to domestic markets. In a context of homogeneous products, it is expected that goods sold in foreign markets have closer substitutes than those sold in domestic markets. It supports the usual assumption that foreign demand elasticity is bigger than domestic ones, so that non-exporting firms would have larger price-cost margins than exporters. Additionally, competitive environment influences the capacity of firms to achieve collusive agreements. That capacity may be larger in domestic markets, where firms are more protected from international competition, than in foreign markets. In fact, this is the main argument used to justify the negative impact of import penetration on domestic margins. Note that if differentiated products are assumed, exporters could sell to specific fringe demands in foreign markets with price elasticity smaller than the domestic demand. In this context exporting firms are not price takers in international markets and enjoy market power abroad. Therefore, margins related to sales in foreign markets could be higher than in domestic markets.

Two final questions should be considered in order to develop an empirical analysis of the relationship between export activity and mark-ups. Firstly, export is not always a persistent activity for firms: entries and exits from foreign markets are usually found. Additionally, it is usual to observe firms with erratic behavior in export activity. For these switching firms sunk costs would not be relevant, and their behavior is probably more related to incidental orders than to an elaborated strategy of entering in foreign markets. These arguments suggest that it is advisable to carefully distinguish the groups of firms that are not persistent exporters/nonexporters.

Secondly, the comparison between exporting vs non-exporting firms does not take into account that usually exporters also sell in domestic markets. Margins across markets for each firm could differ due to dissimilarities in demand elasticity and in the competition intensity.

Additionally, differences in marginal costs associated to variable (e.g., transport) or sunk costs (e.g., costs associated to sales networks) could explain that exporters set different margins across markets. However, cost externalities from sales in foreign markets to domestic ones (i.e., scale economies) should be considered. Efficiency advantages induced by export activity should benefit firms' cost structure as a whole, irrespective of the market destination.

In short, there are arguments supporting differences in mark-ups for exporters vs nonexporters. On the one hand, those related to efficiency advantages suggest larger margins related to export activity. On the other hand, those related to the degree of market competition would imply smaller margins related to export activity. Consequently, in order to know what effect prevails an empirical analysis is required.

Econometric specification

We consider that firms sell a differentiated product in markets characterized by imperfect product competition, though we do not assume any specific market structure. The price-cost margin can be expressed, as usual, from 5 :

(1 )

P C µ = (1)
where C´ is marginal cost, P is product price and µ is the corresponding price-cost margin. If µ is expressed in terms of the demand elasticity and conjectural variations, the equation ( 1) can be interpreted as the first order condition of the profit maximization for a firm selling without capacity restrictions. Therefore 0 µ = with perfect competition and price is equal to marginal cost, µ is equal to the inverse of demand elasticity if the firm faces monopolistic competition and, if firms operate in an oligopolistic context, µ reflects not only demand elasticity but also the strategic behavior of firms.

A suitable transformation for equation (1) is:

ln (1 ) ln PY C C Y µ = (2)
where Y is output (sales) and C is variable cost. From equation (2), the ratio of nominal sales to variable cost and output cost elasticities are required to estimate the margin. The advantage over equation ( 1) is that nominal and real sales are needed instead of price levels. The former are easier to be obtained because it only requires a price index. With respect to firm costs, we 5 We omit the subscript about firms and time for simplicity. ( )

, , , f C C P Y K t = (3)
where P f is a vector of prices of variable factors (labor (X L ) and intermediate inputs (X M )), K is capital stock and t is a time trend which represents the state of technology. We assume that variable factor prices are exogenous to firms. The cost function has the usual properties: it is increasing in variable factor prices and output, and it is also homogeneous of degree one in factor prices. Following Bernstein and Mohen (1991) and [START_REF] Bughin | Capacity Constraints and Export Performance: Theory and Evidence from Belgian Manufacturing[END_REF]

C C l Y w K Y w Y K P w K Y w K t = = + + + + + + + + + + + (4)
where w is the ratio P L /P M . In the previous specification, the restrictions corresponding to a degree one homogeneous cost function in variable input prices (P L and P M ) have been imposed. Additionally, a time trend t has been added to measure technical progress 6 .

Deriving from translog cost function, the equilibrium condition for the product market (equation ( 2)) can be rewritten as follows: 6 We omit the parameter 4 to facilitate comparisons with the multiproduct specification forward. (1 ) ln ln ln

PY + w + K Y C µ = + + (5)
where ( / PY C ) is the ratio of revenue to variable cost. The margin of firm i in period t is parameterised to take into account the heterogeneity of firms across different industries and the impact of the business cycle according to the following equation:

it s it D µ µ = +
where s µ are industry dummies, related to demand elasticity, and D it is a firm indicator of the business cycle for each firm. Though the business-cycle is usually approached with macroeconomic indicators, the variable included in our parameterization is an individual variable calculated from the information given by firms. Specifically, the firms give annual information about market served (up to five) identifying the proportion of sales in each market.

They also identify the behavior of market demand during one year with respect to the previous year according to three different categories: recession, stability and expansion. A value of 1, 2 and 3 is assigned to each category, respectively. We calculate an index for all markets served by the firm, weighting the values 1, 2 and 3 by the proportion of sales in each market. This variable, which is continuous between 1 and 3, allows us to measure more accurately the evolution of business-cycle in relevant markets for each firm.

To analyze how export activity affects mark-ups we have also included a set of dummy variables in the parameterization of margin (equation ( 5)), namely ED. It considers if the firm has always exported throughout the period (persistent), whether it has never exported (nonexporter), whether it has entered or exited in some year in the period (entrant and exiter, respectively) and, finally, wheher the firm has entered and exited more than once throughout the period (switcher). Alternatively, for exporting firms we have also included export ratio, defined as exports over total sales. Therefore, the econometric specification is:

F o r P e e r R e v i e w 11 1 5 6 8 [1 ( )] ln ln ln s it it PY D ED + w + K Y C µ + + = + + (5b)
Besides, though labor cost share is not necessary to identify the parameters, it is included in the set of equations for the sake of efficiency. Shephard´s lemma can be used to derive the equilibrium conditions for input demand: ln ln

f f C S = P
, where

f f f P X S = C
is the variable cost share of input. Labor cost share is then estimated as 7 : ln ln ln

L L 2 5 7 9 P X = + Y + K + w C + (6)
The equations system to be estimated is comprised of ( 4), ( 5b) and ( 6). As usual, using the estimated parameters, the share of labor costs and the intermediate inputs costs allow us to obtain some additional results such as scale economies, substitution elasticity and the own-price elasticity of input demand.

To take into account the multimarket character of exporters we have extended the uniproduct framework to a multiproduct specification. This is the approach used by [START_REF] Bernstein | Price-Cost Margins, Exports and Productivity growth: with an Application to Canadian Industries[END_REF] and [START_REF] Bughin | Capacity Constraints and Export Performance: Theory and Evidence from Belgian Manufacturing[END_REF] to estimate price-cost margin differentiating between export and domestic markets. Assuming that exporters sell simultaneously in domestic (d) and foreign (x) markets, the corresponding set of equations to be jointly estimated is now:

7 Since the sum of the two variable inputs shares equals unity, the intermediate inputs share can be treated as a residual. for establishing delivery channels in export markets, would not be considered in this shortterm benchmark. This approach implies imperfect product substitution in the production function between output sold in domestic and foreign markets.

F

Data and descriptive analysis

The sample used consists of a balanced panel of Spanish manufacturing firms for the period 1990-1999. As can be seen in Table 1, jointly with the two extreme situations (exporting/nonexporting), a significant number of firms change their behavior in the period. About 10% of firms enter in foreign markets (entrants), while almost 17% of firms enter or exit more than once throughout the period (switchers). It suggests that exporting is a mere occasional activity for about one fifth of firms. On the contrary, it is very strange to observe firms exiting from foreign markets (exiters): it only happens in about 2% of the cases 8 . Additionally, average export ratio (defined as exports over total sales) is clearly related to export persistence. It is about 35% for exporters, and it is less than 10% for firms that do not have a persistent activity in foreign markets. As is usual when export activity is analyzed, size is positively related to export activity: about forty percent of small-medium firms (less than 200 employees) exported during this period. For larger firms (more than 200 employees) this percentage surpasses 80%.

[Table 2]

8 This result could be biased due to the classical attrition problem in balanced panels. With the aim of obtaining a preliminary picture about differences in margins among firms, we use a simple approach based on the correlation between an accounting indicator of firm profits (Operating surplus over sales, OS) and export activity. The latter is measured with a set of dummy variables that capture the degree of persistence in export activity according to previously defined categories. The first two columns of Table 2 show the results of five regressions where the dependent variable is the operating surplus and the explanatory variables are a constant and the corresponding dummy. As can be seen, persistent exporters show larger average surplus than the rest of firms, while the opposite result emerges for switchers and nonexporters. Entrants (exiters) have margins above (below) average, though the differences are non-significant in both cases.

These results could hide a composition bias: if the probability of being an exporter is larger in industries with larger margins, then the previous comparison of average values is reflecting inter-industry differences. To control it, the third and fourth columns of Table 2 show five alternative estimations where the dependent variable is the deviation of operating surplus with respect to the industry average. Industries are defined at two-digit level of the European industrial classification (NACE) and it comprises twenty manufacturing activities. As can be seen, there are not significant differences with respect to former estimates and, consequently, the positive correlation between export activity and operating surplus seems to be robust to inter-industry differences. This result is similar to those obtained by [START_REF] Bernard | Plants and Productivity in International Trade[END_REF] about productivity advantages for exporters.

These descriptive results suggest that efficiency advantages for exporters prevail over international competition effects. However, as was previously suggested, an interesting question is whether such efficiency effects imply that exporters have higher operating surplus irrespective of the geographical market or, by the opposite, margins differ among them. The sixth row in Table 2 shows the results for the subsample of persistent exporters, where a constant and the export ratio have been included as explanatory variables. In this case a negative relationship between the intensity of export activity and surplus arise, even when inter-industry differences are controlled. This result could suggest that foreign margin is lower than domestic margin for persistent exporter. The analysis in the next section assesses this question more carefully.

Econometric results

In this section the theoretical benchmark explained in Section 3 is applied. We begin by considering all firms, evaluating whether margins differ among different groups according to the degree of persistence in export activity: non-exporters, entrants, exiters, switchers and exporters. It implies to impose the same structure of costs for the entire sample. However, dummy variables are introduced in the translog cost (equation ( 4)) and margin equation (equation (5b)) to control for differences in technical conditions across industries.

Descriptive statistics for all variables and sub-samples are showed in Table A.1 of the Appendix. . Industrial dummies are also jointly significant.

[Table 3] With respect to margins, the first column in Table 3 shows the parameter µ s , calculated as the average of a set of 14 industrial dummies. The F-test showed at the bottom of Table 3 confirms their significance. As we said above, a demand indicator is included to consider the business cycle. An increase in this variable means an improvement in market conditions. As can be seen, the parameter for firm indicator of demand evolution (D it )

presents the expected positive sign, which suggests a procyclical behavior of margins. This parameter, multiplied by the average value of demand evolution, and added to estimated parameter µ s , allows us to obtain an average margin of 11.2% for all firms in the complete period.

10 When estimations are run for each group, exporter and non-exporters present values around -2.5, while the .../... In column 2, the margin is parameterised to take into account differences across firms according to export behavior. Because we omit the dummy referred to non-exporters, the coefficients for the other groups reflect the relative differences with respect to those firms that do not export. The results indicate that entrants and persistent exporters show larger margins than non-exporters. However, there are non significant differences between this last group and those firms which exit or enter and exit (switchers) in foreign markets.

Figure 1 presents the sample average of the margins during the nineties by sub-samples.

In this case the values for demand evolution are specified for each group of firm and for each year. Deviation from perfect competition is observed in all groups of firms, a result in line with previous empirical research about firm margins (see [START_REF] Nishimura | Estimating the mark-up over marginal cost: a panel analysis of Japanese firms 1971-74[END_REF]). In keeping with the estimated coefficient of the evolution of demand in Table 3, the margins are procyclical and

show the smallest values in 1992-1993. This behavior is consistent with the cycle of the European economy, which experienced a short recession in those years 11 .

[Figure 1]

The main result obtained is that persistent export activity seems to be associated with larger margins. Specifically, while non-exporters have an average margin of around 10.4%, it is about 12% for persistent exporters. This difference, significant at 99%, suggests that efficiency advantages of exporters are also reflected in relative margins. From the estimates of Table 3, and using equation (5b), it is possible to calculate the predicted margin for each firm. Figure 2 shows the distributions of the average margins for the period 1991-1999 for non-exporters, .../... technical progress is smaller for exiters (-1.6) and switchers (-1.3).

11 Though there are theoretical arguments for both signs, the empirical evidence supports a positive relationship between the economic cycle and the margins. See, for example, [START_REF] Lima | Profit margins and business cycles in the Brazilian industry: a panel data study[END_REF]. with margins between 0 and 0.2. Comparing across different groups, we observe that there is a bigger proportion of non-exporting firms with small margins. Entrants show the largest values, which is related to the existence of a small share of firms with margins bigger than thirty percent. These firms could be taking advantage of some product innovations which let them to access to specific fringe of foreign demand. If that would be the case it seems reasonable to expect that such margins would be reduced when they stay in export market for a longer period.

However, though technological effort is higher for these firms than for non-exporters, we do not find significant differences between entrants and persistent exporters. We only observe that entrants firms with small and medium size (less than 200 employees) are younger than persistent exporters. Nevertheless, the average margin could be conditioned by extreme values, due to the small number of firms that enter in the export activity.

[Figure 2]

The estimate of the translog cost function also allows us to obtain predictions for output cost elasticities and the marginal cost for each firm. Using the sample average of the share of labor cost and intermediate inputs to total variable costs, it is possible to calculate the Allen-Uzawa partial elasticities of substitution, the own-price elasticities of demand and returns to scale economies. As expected, price elasticities are negative and the inputs (labor and intermediate materials) are substitutes. The scale elasticity value is equal to one suggesting that firms seem to operate under constant returns to scale 12 .

[Table 4] 12 These results are available upon request. The above results suggest that export activity is positively related to margins.

However, the comparison among groups is affected by the non persistent pattern of groups 2, 3 and 4, which would share characteristics both of exporters and non-exporters. For that reason a complementary estimate, restricted to groups 1 and 5, is shown in Table 4. The results again show clear differences between persistent non-exporters and persistent exporters. Is this a consequence of the kind of firms operating in both markets, or rather the effect of market characteristics? To answer this question we focus our attention on persistent exporters and those firms that start to export throughout the period. Because of the multimarket characteristics of both groups, the use of a multiproduct cost function can provide useful information. As was explained in Section 3, this approach allows us to estimate the margin in domestic and foreign markets.

Table 5 presents the estimates for the group of firms that are persistent exporters.

These firms are multimarket by nature, given that all of them sell simultaneously in domestic and export markets. It allows us to answer whether observed differences in margins among exporters and non-exporters are due to efficiency advantages of the former or whether they are the consequence of differences in competitive pressure among foreign and domestic markets. In particular, the previous result about larger margins of exporters is not only coherent with efficiency advantages for exporting firms, but also with a smaller competitive pressure in foreign markets. To contrast this question we follow two different approaches.

Firstly, in column 1 we estimate jointly the translog multiproduct cost function (equation ( 7)), the domestic and foreign margin equations (8a and 8b) and the cost labor share (equation ( 9)).

It lets to obtain margins differentiated across markets. In this case, we also introduce two business cycle indicators, one for each market. Secondly, in column 2 we follow a unimarket approach, without distinguishing between domestic and foreign markets, but where the margin is parameterised taking into account the intensity of export activity, measured as export ratio (ER).

[Table 5]

As can be seen in column 1, the average price-cost margin in foreign markets is smaller than margin in domestic destinations. This result is in line with those obtained by [START_REF] Bernstein | Price-Cost Margins, Exports and Productivity growth: with an Application to Canadian Industries[END_REF], [START_REF] Bughin | Capacity Constraints and Export Performance: Theory and Evidence from Belgian Manufacturing[END_REF] and [START_REF] Moreno | Domestic and Foreign Price-Marginal Cost Margins: An Application to Spanish Manufacturing Firms[END_REF].

Additionally, note that the estimated coefficient associated to lnY d lnY x (parameter 4 ) is negative and significant, reflecting cost complementarities between both outputs: variable cost due to one output declines as the other output grows 13 .

The approach used in column 2 supports the previous result about the effect of export activity on margins for exporters. The coefficient of export ratio is negative: the bigger the export intensity, the smaller the margin of exporters. It points out that exporting firms affront larger competitive pressure in international markets. Given that we had obtained that exporters have larger margins that non-exporters, we can conclude that efficiency advantages dominate over competitive pressures for exporters.

With respect to entrants, though they are multimarket firms once they start to export, there is a problem with zero values before to entering in foreign markets. Several solutions have been provided when the objective is just to evaluate cost parameters. The most well- 13 The estimation also allows us to obtain predictions for output cost elasticities and marginal costs in each market. The export elasticity was smaller than the domestic: 0.398 and 0.595, respectively. As we expected, the marginal costs for output sold in foreign markets are slightly larger than marginal costs associated to products sold in domestic markets. .../... [START_REF] Caves | Flexible costs functions for multiproduct firms[END_REF]). However, given that our objective is to consider cost function in a joint system to estimate margins, zero values for exports continues being a problem. Specifically, the left side of equation (8b) will be zero in those years that entrants do not export. Although we can use the proposed approach to estimate the cost equation, it is impossible to use it for the joint system.

Therefore, we just present an estimate where export ratio is included in the margin parameterisation. The results, showed in column 3 of Table 5, are coherent with those obtained for persistent exporters: export intensity affects negatively to margins. Note that we are treating homogeneously to all firms, with independence whether they enter at the beginning or at the end of the period. However, as was previously pointed out, the small number of available observations for this group makes difficult to capture the dynamic evolution of the effect of exporting behavior on margins.

This restriction on data avalaibilty also difficults specific industry analysis to contrast whether results obtained for persistent exporters can be generalized. Table 6 shows the results for two of them with enough observations. As usual, inter-industry heterogeneity is substantial. For the automobile industry, the larger the export ratio the larger is the average margin. This result can be related to product differentiation, which could justify a bigger margin whether firms make a profitable use of specific fringes of demand. Additionally, most firms in this industry are multinationals and, in this sense, it is likely that they have market power abroad. On the contrary, Textile industries show the same result that the manufacturing industry as a whole. This can indicate that firms in this activity behave as price-takers in international markets. Majority of these firms are domestic-located and have not productive plants in foreign countries.

[Table 6]

Conclusions

The empirical evidence strongly supports that exporters are more productive than nonexporters. It is in accordance with theoretical predictions, which have emphasized the idea that only more productive firms enter in export markets because they generate enough revenues to cover sunk costs associated to this activity. However, there is scarce evidence about the effects of export activity on firm margins. While most theoretical papers have assumed fixed markups, more recent research has considered them as endogeneous. In particular, [START_REF] Melitz | Market Size, Trade, and Productivity[END_REF] consider two potential effects in firm margins related to export activity. On the one hand, more productive firms use efficiency advantages to set larger margins. On the other hand, this selection effect is outweighted by the pro-competitive effect related to entry in international markets.

This paper analyzes this issue using a structural approach to identify price-cost margin among groups of firms. These are defined according to the degree of persistence in export activity. The results point out that exporting firms, both persistent exporters and entrants, set larger margins than non-exporters. It suggests that efficiency advantages found in previous empirical evidence are transmitted to mark-ups. Additionally, when the analysis is confined to exporting firms, we obtain that margins in foreign markets are smaller than those related to domestic markets. It suggests that the procompetitive effect is relevant: exporters affront larger competitive pressures in international markets. However, this negative effect related to the exposure to foreign markets does not dominate over the positive effect related to efficiency advantages. This result is in line with [START_REF] Görg | Price Cost Margins and Exporting Behaviour: Evidence from firm level data[END_REF] who, using a different approach, found that UK exporters have higher mark-ups than non-exporters for differentiated goods. -The number of observations when all firms are considered (regressions (1) to ( 5)) is 6950. For the subsample of exporters the number of observations is 3250.

F

-t-ratios in parenthesis.

-OS s is the average value of operating surplus for industry s. 1992-19991992-19991992-1999 Notes to Notes to 1992-1999 1992-1999 Notes to Table 6: -t-statistics are robust to heterocedasticity. In the Sargan test and industrial dummies F-test, freedom degrees are in parenthesis.

-Apart from the exogenous variables, the instruments used are the lagged values at t-2 of y, y 2 , yw, yk in the cost equation and y, y 2 in the margin margin equation.

  develops a dynamic model to explain intra-industry reallocations across firms with heterogeneity in the context of an open economy. The existence of entry costs in export markets plays a crucial role to explain the connection between trade and productivity: only more productive firms can cover entry costs in foreign markets. In this model trade affects the distribution of firms through the domestic factor market. Specifically, exporters and entrants increase the demand for labour. As consequence, real wage goes up and the least productive firms have to exit. Finally, less efficient survival firms do not export because they can not cover export sunk costs and reduce both domestic market share and profits.

  -term context where capital stock is considered as a fixed factor. In this sense, the variable cost function is defined as follows:

  . All distributions are slightly skewed, with a large proportion of firms

  Generalized Multiproduct Cost Function (GMCF) that uses a Box-Cox metric to transform zero values

  indicator of the business cycle in all markets, domestic and foreign markets): In the ESEE survey, each firm identifies the behavior of market demand during one year with respect to the previous years according to three different categories: recession, stability and expansion. A value of 1, 2 and 3 is assigned respectively to each category. The domestic and foreign indices are constructed by weighting the previous values over all domestic and foreign markets defined by each firm. The weights are the proportion of sales in each market with respect to total sales. Although the original variable takes values 1, 2 and 3 in each market (up to five) where the firm sells, the indices that we calculate for each firm takes are "continuous" between 1 and 3.

  Figure 1: Price-Cost margins (Sample averages)

  The variables were obtained from the Encuesta Sobre Estrategias Empresariales (ESEE, Survey on Business Strategies). This survey is carried out yearly by the Fundacion SEPI, with the support of Spanish Ministry of Industry. The sampling scheme is For firms employing more than 200 employees, the rate of participation is about 60%. The sample considered is about 2000 manufacturing firms that have ten or more employees each year. We exclude firms not surveyed for every year throughout that period and those for which information is lacking. This was especially relevant for capital stock and price variations, required in order to obtain the price index of intermediate inputs and the price indices of domestic and foreign markets (see Appendix for variable definition).

	around 4%. The number of
	available firms, after those with incomplete information were excluded, is 695 (6950
	observations).	F r o	[Table 1]
		P
		e
		e r
			R e v
			i e
			w
			13

conducted for each manufacturing NACE class (two-digit) level. Companies with between 10 and 200 employees are chosen by a random sampling scheme and the rate of participation is

Table 3

 3 shows the joint estimate of the translog cost function, the cost labor share and the margin equation by the Generalised Method of Moments (GMM)9 . We assume that firms are price-takers in variable input markets, so variable input prices are considered exogenous, while endogeneity in sales is assumed. The estimation is carried out by instrumenting the endogenous variables with their cross-section lagged values at t-2. The identification of the parameters depends on whether lagged values of the endogenous variables are valid instruments. The Sargan test of overidentifying restrictions, a test of instrument validity, is presented at the bottom of the columns and the validity of instruments is accepted. Two additional artificial dummies (Mov1 and Mov2) have been also included to control firms that have experienced mergers or scissions during the period. The time trend in the estimate of the cost function, whose associated parameter can be seen as technical progress, presents the expected negative sign and a reasonable value (-1.6) 10

	F o r
	P
	e
	e r
	R e v
	i e
	w

  The comparison of some relevant variables between exporters and non-exporters provides some clues about what exporters do with these Specifically, the relative average wages are 46.7% larger for exporters, which are also much more technological intensive than non-exporters. For example, while the share of staff employed in R&D activities (over total employment) is 2.55% for persistent exporters, it is only 0.51% for non-exporters. This result should be considered carefully because export and technological activities are surely simultaneous decisions for firms.

	larger margins.
	F o r
	P
	e
	e r
	R e v
	i e
	w
	23

  Value of gross output minus variable costs of production divided by the value of total sales. The gross output value is computed as sales + stock variation + other The sum of intermediate consumption (raw materials purchases, energy and fuel costs and other external services) plus labor costs minus the stock variation. W (Cost per worker relative to price of intermediate inputs): P L /P M , where: P M (Price index for intermediate inputs): It is calculated as a Paasche index, weighting the price variations of raw materials, energy and services purchased of surveyed firms. P L (Cost per worker): Labor cost divided by the average workers of the firm during the year. It is calculated by deflating nominal domestic sales by domestic price (P d ). Domestic sales are the total sales of the firm minus its exports. It is net stock of capital for equipment in real terms. It is calculated by using

	Appendix: Variable definitions and descriptive statistics the perpetual inventory formula:
	1 d K P P (1 ) ( / t t t OS (Operating surplus): revenues, and the variable costs of production as intermediate consumption (raw materials and 1 ) t K I = + where P is the price index for equipment, d are the rates of depreciation, and I is the investment
	in equipment.
	services) + labor costs.
	ER (Export ratio): Proportion of exports over total sales.
	o r P e e r F o r P e C (Variable costs): Y (Output sold): It is calculated by deflating nominal sales by price (P). e r
	R e v Y x (Output sold on the export market): It is calculated by deflating nominal exports by export price (P x ). R e v
	i e w i e Y d (Output sold on the domestic market): P, P d and P x (Price index for output sold in all markets, in domestic and foreign markets): The w
	surveyed firms give annual information about markets served (up to five), identifying their
	relative importance (in percentage) in total sales of the firm. Additionally, each firm identifies
	the geographical area and the variation of price with respect to the previous year. This
	information allows us to calculate a price index for all markets and for each market, using the
	proportions with respect to total sales as weighting.
	25

K (Capital stock):

Table A

 A

			.1
	Variable descriptive firms (logarithmic variations rates, 1991-99)
	All firms	Non-exporters	Entrants	Exiters	Switchers	Exporters
	Output (volume terms)	4.2	2.1	5.8	1.7	4.9	4.9
	Output (nominal terms)	5.6	3.6	7.4	2.7	6.1	6.3
	Cost per worker (P L )	4.9	4.8	4.9	4.5	4.5	5.1
	Price index for intermediate inputs	3.3	3.6	3.2	3.3	3.6	3.0
	Stock of real capital	8.2	7.2	11.4	7.1	8.9	7.9
	Variable cost	5.9	4.1	7.1	2.3	6.3	6.6
	F o r F o r
	P P
	e e
	e r e r
	R e v R e v
		i e i e
		w w

Table 1 .

 1 Descriptive statistics across type of firms

	Non-exporters	Entrants	Exiters	Switchers	Exporters

Page 30 of 36 Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK

	Submitted Manuscript
	F o r
	P
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	e r
	R e v
	i e
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	30

Table 2 -

 2 Operating Surplus over Sales (OS): OLS Estimations

	Dependent variable:
	OS	OS-OS s

Table 3 .

 3 Cost Function, Cost Labor Share and Margin Equation (Joint Estimate by GMM). Apart from the exogenous variables, the instruments used are the lagged values at t-2 of the following variables: y, y 2 and time and industry dummies for the cost equation and y, y 2 , k, w and time and industry dummies for the margin equation. -In the Sargan test and industrial dummies F-test, freedom degrees are in parenthesis.

		(1)		(2)
		Coefficients t-statistics Coefficients t-statistics
	0	-0.378	-0.5	-0.453	-0.6
	1	1.034	32.2	1.052	31.5
	2	0.204	1.5	0.205	1.5
	3	-0.024	-0.3	-0.030	-0.4
	5	0.010	1.5	0.010	1.4
	6	0.027	9.2	0.028	9.5
	7	-0.012	-0.7	-0.011	-0.7
	8	-0.014	-7.4	-0.015	-7.8
	9	-0.001	-0.0	-0.001	-0.0
	10	-0.014	-3.8	-0.014	-3.8
	11	-0.016	-2.1	-0.016	-2.1
	Mov1	-2.496	-1.5	-2.490	-1.5
	Mov2	1.687	1.6	1.761	1.7
	µ s	0.066	3.0	0.060	2.7
	Entrants			0.030	3.8
	Exiters			0.006	0.7
	Switchers			0.007	1.1
	Exporters			0.011	2.1
	D it	0.022	6.7	0.022	6.6
	Average Margin	0.112	5.6
	Non-exporters			0.104	5.2
	Entrants			0.136	6.5
	Exiters			0.111	5.3
	Switchers			0.112	5.3
	Exporters			0.118	5.9
	Sargan test	14.9 (13)		13.7 (13)
	Industrial dummies F-test	78.6 (19,5541)		77.9 (19,5541)
	(cost)
	Industrial dummies F-test	83.5 (13,5547)		85.8 (13,5547)
	(margin)
	Number	5560		5560
	Years	1992-1999		1992-1999
	Notes:
	-t-statistics are robust to heterocedasticity.
	-

Table 4 .

 4 Cost Function, Cost Labor Share and Margin Equation (Joint Estimate by GMM): Apart from the exogenous variables, the instruments used are the lagged values at t-2 of the following variables: y, y 2 and time and industry dummies for the cost equation and y, y 2 , k, w, wk, k 2 and time and industry dummies for the margin equation. -In the Sargan test and industrial dummies F-test, freedom degrees are in parenthesis.

	Persistent exporters and non exporters
		(1)		(2)
		Coefficients t-statistics Coefficients t-statistics
	0	-0.496	-0.5	-0.631	-0.6
	1	1.034	28.1	1.061	26.7
	2	0.398	2.8	0.390	2.7
	3	0.027	0.2	0.024	0.2
	5	0.007	0.9	0.008	1.0
	6	0.030	9.6	0.030	9.7
	7	-0.047	-2.9	-0.047	-2.9
	8	-0.015	-7.4	-0.017	-7.7
	9	0.101	2.8	0.103	2.8
	10	-0.016	-3.0	-0.016	-2.9
	11	-0.020	-3.6	-0.021	-3.6
	Mov1	-1.767	-1.1	-1.782	-1.1
	Mov2	1.654	1.5	1.790	1.6
	µ s	0.077	3.1	0.072	2.8
	Exporters			0.012	2.3
	D it	0.021	5.6	0.022	5.7
	Average Margin	0.121	5.5
	Non-exporters			0.115	5.0
	Exporters			0.130	5.6
	Sargan test	11.0 (15)		9.98 (15)
	Industrial dummies F-test	116.3 (19,5541)		113.8 (19,5541)
	(cost)
	Industrial dummies F-test	118.4 (13,5547)		118.4 (13,5547)
	(margin)
	Number	3952		3952
	Years	1992-1999		1992-1999
	Notes:
	-t-statistics are robust to heterocedasticity.
	-

Table 5 .

 5 Cost Function, Cost Labor Share and Margin Equation (Joint Estimate by GMM):

		Persistent exporters and entrants
		Persistent exporters		Entrants
		Multimarket (1)	Unimarket (2)	(3)
		Coeff.	t-stat.	Coeff.	t-stat.	Coeff.	t-stat.
	0	0.888	2.0	-0.129	-0.1	0.756	1.3
	1			1.082	17.0	0.987	11.8
	1 d	0.533	29.3
	1 f	0.523	11.1
	2	-0.048	-0.4	0.178	0.9	-0.583	-2.0
	3	-0.058	-1.2	-0.075	-0.6	-0.014	-0.2
	4	-0.171	-38.2
	5			0.002	0.2	0.061	3.0
	5 d	0.020	2.5
	5 f	-0.005	-0.7
	6			0.033	7.9	0.024	2.2
	6 d	0.014	7.5
	6 f	0.016	8.9
	7	-0.016	-1.2	-0.015	-0.8	0.037	1.4
	8			-0.017	-6.2	-0.014	-2.2
	8 d	0.077	39.6
	8 f	0.077	27.3
	9	0.071	2.3	0.055	1.0	-0.186	-3.1
	10	-0.013	-4.5	-0.016	-2.3	-0.016	-2.7
	11	-0.022	-5.7	-0.018	-2.2	-0.019	-3.1
	Mov1	-0.506	-1.3	-0.942	-0.8	-0.134	-0.2
	Mov2	0.302	1.7	0.574	0.6	0.468	1.5
	µ s d µ s µ s f	0.060 0.045	2.3 1.5	0.074	1.6	0.123	3.7
	D it			0.019	3.7	0.019	1.8
	D it d	0.024	3.8
	D it f	0.028	3.9
	ER			-0.037	-3.8	-0.002	4.7
	Average margin			0.103	2.4	0.153	6.8
	Domestic	0.111	5.4
	Foreign	0.097	3.1
	Sargan test	37.5 (14)	13.7 (9)		20.0 (14)
	Ind. Dum. F-test (cost):	191.3 (19,2581)	124.4 (19,2581)	190.8 (17,543)
	Ind. Dum. F-test	86.2 (13,2587)	110.8 (13,2587)	81.1 (12,548)
	(margins):	71.9 (13,2587)
	Number of observations	2600		2600		560
	Number of firms	325		325		70
	Years

Table 5 :

 5 -t-statistics are robust to heterocedasticity. In the Sargan test and industrial dummies F-test, freedom degrees are in parenthesis.-In Column 1, apart from the exogenous variables, the instruments used are the lagged values at t-2 of y d , y x , y d 2 , y x 2 , y d y x , y d w, y x w , y d k, y x k. In the second estimate, y and y 2 are used in the cost equation. In the last column y, y 2 and yk (y, y 2 ) are used in the cost (margin) equation.

	F o r
	P
	e
	e r
	R e v
	i e
	w
	34

Table 6 .

 6 Cost Function, Cost Labor Share and Margin Equation (Joint Estimate by GMM):

		Persistent exporters
		Vehicles	Textile, clothing, leather,
			fur and footwear
	0	0.937 (1.2)	-0.128 (0.3)
	1	1.211 (14.7)	1.093 (14.1)
	2	0.319 (0.9)	-0.311 (1.5)
	3	-0.407 (5.3)	-0.073 (1.5)
	5	0.014 (0.6)	0.016 (1.1)
	6	-0.004 (0.1)	0.017 (3.0)
	7	0.029 (0.5)	0.025 (1.3)
	8	-0.010 (2.3)	-0.012 (2.8)
	9	-0.226 (1.2)	-0.069 (1.2)
	10	0.017 (2.7)	-0.007 (2.6)
	11	-0.039 (6.1)	-0.009 (1.9)
	Mov1	0.308 (1.5)	-0.103 (0.4)
	Mov2	0.303 (1.8)
	µ	0.128 (3.0)	0.129 (5.2)
	Export ratio	0.071 (2.6)	-0.027 (1.5)
	D it	0.016 (2.2)	0.005 (0.6)
	Average margin	0.196 (5.4)	0.130 (7.3)
	Sargan test	8.33 (8)	3.0 (9)
	Number	248	312
	Years

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript

The estimations is carried by TSP program. Note that the margin equation is non-linear. This fact is considered in the joint estimation.

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript


Ali M Ahmed
email: ali.ahmed@vxu.se.

What's in a surname? The role of ethnicity in economic decision making

Keywords: C91 -Laboratory, Individual Behavior < C9 -Design of Experiments Discrimination, Experiment, Trust game, Dictator game

HAL is

1 Introduction "What's in a name? That which we call a rose By any other name would smell as sweet" William Shakespeare, Romeo and Juliet, Act 2, Scene 2

The challenging circumstances of people with foreign backgrounds on the labour market in Sweden have initiated a debate on whether people with foreign backgrounds are discriminated against. 1 When faced with observably similar applicants, do employers discriminate by ethnic background? Many will answer "yes", arguing that most people with foreign-sounding names are excluded in the initial stage of the recruiting process and will never reach the interview stage. The same problem can be expected in other situations (e.g., when people search for apartments). Arai et al. (1999) present results from a survey study on a sample of people with foreign backgrounds that shows that more than 70 percent of the respondents believed that having a foreignsounding name significantly limited their possibility of getting a job.

In recent years, more and more Swedish people with foreign-sounding surnames have changed their surnames to Swedish-sounding surnames. The proportion of people who changed their foreign-sounding surnames was less than 10 percent in 1999, but that number increased to more than 22 percent in 2004-the proportion has more than doubled. 2 People may change their names for many reasons, but a reason why this 1 The same debate could probably be found in many other countries as well. But we discuss the Swedish case since we conducted our experiments in Sweden. Probably, the same argument could be applied to other countries. There are many studies based on registered data that indicate discrimination; for example, see Hammarstedt (2001) and Rooth and Ekberg (2003) for Sweden and Darity, Hamilton, and Dietrich (2002) and Queneau (2005) for the U.S. 2 Source: Swedish Patent and Registration Office. In 1999, 1159 individuals in Sweden changed their surnames, 114 of whom changed from a foreign-sounding surname to a Swedish-sounding surname. In 2004, the corresponding figures were 1252 and 276, proportion may have increased is that people with foreign-sounding names are afraid of being discriminated against. 3 It is thus possible that foreign-sounding names affect the possibility of obtaining a job or an apartment. Or, perhaps, people only think that. Data limitations usually make it difficult to empirically test these conjectures.

We present laboratory experiments to circumvent this difficulty. We investigate whether discrimination takes place in two games of economic decision making where the surnames of the players are exposed. The first game used is the trust game introduced by Berg, Dickhaut, and McCabe (1995). In this game, two players receive an initial amount of money. The first player, the trustor, is given a choice of sending all, some, or none of the money to the other player, the trustee. The experimenter triples the money sent. The trustee then chooses how much, if any, of the tripled money to return back to the trustor. This ends the trust game. The second game used is the dictator game introduced by Kahneman, Knetsch, and Thaler (1986). This is a one-stage/two-person game in which the first player, the dictator, must decide how to distribute a sum of money between her-or himself and a second player, the recipient. The recipient must accept the dictator's decision.

Participants were recruited from two universities, and one of the universities contained a large number of students with foreign backgrounds. Ethnicity was signalled by exposing participants' surnames to each other. Thus, the question in focus is how the information about the co-player's surname, from which the players are assumed to infer their co-player's ethnic affiliation, affects the behaviour of players in the trust game and the dictator game. We arrived at the following observations: The findings for the trust respectively. It is reasonable to suspect that individuals who changed their foreignsounding surname were overrepresented in 2004, since roughly 10 percent of the Swedish populations had a foreign background during these years.

3 It should also be mentioned that it is presumably a bigger step to change a foreignsounding surname to a Swedish-sounding surname than it is to change a Swedishsounding surname to another Swedish-sounding surname. We also conducted a second dictator game experiment to check the robustness of the results in the first experiment. Another reason for this replication is that we wanted to check if discrimination found in the first experiment was systematic, in the sense that foreigners themselves discriminate against other foreigners. Hence, the question in focus in the replication was whether people with foreign backgrounds discriminated against other people with foreign backgrounds. A difference from the dictator game in the first experiment is that we did not signal ethnicity by exposing participants' surnames. Instead we recruited participants from Swedish for Immigrants (SFI) classes and from social sciences classes at the adult secondary schools in Alvesta and Växjö, where SFI classes obviously only contain foreigners and social science classes contain Swedes. Hence, we did not expose participants' names at all in this experiment. Instead, we exposed which class they belonged to. The results of this replication supported the findings in the first experiment: Foreign recipients received on average significantly lower amounts than Swedish recipients. However, we did not find any systematic tendency of discrimination: Foreign dictators treated foreign and Swedish recipients similarly.

There have been few past studies of ethnic discrimination in economics conducted in a laboratory setting. Anderson et al. (2006) gives an excellent review of studies conducted in economics and social psychology. One study closely related to the present study is Fershtman and Gneezy (2001) who also used the trust game and the dictator game. 4 The results of their trust game experiment showed that the average amount of money sent by male trustors to male trustees of Eastern origin was significantly lower than that transferred to male trustees of Ashkenazic origin. The transfers of dictators to different ethnic groups in this experiment indicated that the distributions were similar.

There are differences between Fershtman and Gneezy (2001) and the present study, however. In Fershtman and Gneezy (2001), in the specifications of the trust game, only trustors received the initial endowment. With such a design, trustors may have other motives (unconditioned to the expected behaviour of trustees), such as altruism and fairness, rather than solely investment motives (conditioned to the expected behaviour of trustees) when transferring money to trustees. A wellinvestigated result in experimental economics is that many individuals want to avoid unequal treatment (Fehr and Schmidt, 1999). In the present study, unconditional motives were not triggered for the trustor in the trust game. By giving both players the same initial amount, the trustor's decision is based on the expected behaviour of trustee.

Another difference in the present study is the use of surnames instead of individuals' full names when signalling ethnicity. This is done to eliminate any gender effects. Even if gender effects were controlled, some first names are gender-neutral, which may bias the results. A large body of literature suggests that there are systematic differences in the behaviour of men and women in economic games. 5 Finally, we support our results with a replication study that differs from earlier studies regarding how ethnicity is signalled in the experiment. 2 Discrimination in the trust game and in the dictator dame Discrimination can be the outcome of various causes. In economics, there are commonly two given. Discrimination can occur if economic agents have tastes of discrimination (Becker, 1957). For example, employers on the labour market with specific tastes-for example, preferring people with Swedish backgrounds or disliking people with foreign backgrounds-will primarily hire people with Swedish backgrounds in an employment decision, even if they know that both groups are equally qualified. Discrimination can also be an outcome of stereotypes that, for example, involve employers using the ethnicity of employees to make statistical inferences about the expected productivity (Phelps, 1972). The outcome of the stereotypes will be discrimination, even if discrimination is not the intention, because the employment decision will not be based on the employee's individual productivity but on the expected productivity of the group to which the applicant is supposed to belong.

In the trust game, because trustors are uncertain of trustees' expected behaviour (their reciprocity or inequality aversion), uncertainty is likely to play an important role.

Discriminatory behaviour may arise if trustors have negative stereotypes of trustees with foreign-sounding surnames (believing that foreigners are less trustworthy than natives, for example). Taste-based discrimination, on the other hand, involves people simply disliking or preferring members of one group over another. This can also be a reason for discriminatory behaviour in the trust game: Trustors do not send any money because they do not want to benefit trustees with foreign backgrounds. In the dictator With this setup, the causes of discrimination can be identified. If discrimination is found only in the trust game, then the discrimination is an outcome of stereotypes. If discrimination is found only in the dictator game, then the discrimination is an outcome of tastes. If discrimination is found in both games, however, the answer will be inconclusive.

The first experiment

The first experiment compared the strategic behaviour towards people of two groups with foreign backgrounds 6 -non-European 7 and European 8 -and one Swedish group in two games-the trust and the dictator game. We conducted sessions in which the participants learned the family name of their counterpart, from which they were able to deduce their co-players' ethnic affiliations. 9

Recruitment, participant pool, and matching

The participants were recruited from various summer courses at Växjö University and the University College of Södertörn during the first week of June 2003, and the experiment was carried out in the following two weeks. The main reason for selecting participants from the University College of Södertörn in addition to Växjö University 6 Individuals with foreign backgrounds were individuals who immigrated to Sweden or individuals born in Sweden with parents who immigrated to Sweden. 7 Includes individuals with non-European backgrounds, except individuals with North American and Australian backgrounds. 8 Includes individuals with European (except Swedes), North American, and Australian backgrounds. 9 The written directions and decision sheets are available upon request. The recruitment was mostly carried out through course e-mailing, phone lists, and class announcements, but also with flyers posted and handed out around the campuses. In announcing the experiment, students were promised a participation fee of SEK100. 10 Moreover, they were informed that they would have the possibility to earn additional money. Those students who wanted to participate in the experiment were scheduled in a session. In order to participate, students had to register themselves either directly to the experimenter or through e-mail or phone. Each participant then obtained confirmation through telephone or e-mail with information about the time, date, and place of their session.

The recruiting process of participants was first completed at Växjö University. A total of 93 students signed up for the experiment, which bounded the total number of students that could be recruited at the University College of Södertörn. Hence, the total number of pairs was 93; however, two participants did not show up (both at Växjö University). Among the remaining 91 participants from Växjö University, 44 were men, 10 Which was equivalent to €11, or $12.50, at that time. 9 39 of whom were Swedish, 4 European, and 1 non-European; 47 were women, of whom 45 were Swedish, 2 European, and none non-European. The participants at University College of Södertörn consisted of 48 women, 26 of whom were Swedish, 11 European, and 11 non-European, and of 43 men, of whom 18 were Swedish, 10 European, and 15 non-European. The average participant at Växjö University was 25 years old with 2.6 years of higher education, and the average participant at University College of Södertörn was also 25 years old but with 2.7 years of higher education.

Using the name lists of participants from Växjö University and the University College of Södertörn, generated during the recruiting process, each student was randomly matched with a student from the other university.

Experimental procedure

Fourteen sessions were conducted at the University College of Södertörn and eight sessions at Växjö University. Each session lasted approximately twenty minutes, and a single experimenter conducted all sessions. Participants were recognized and registered on arrival. They received a show-up receipt worth SEK100, and were directed to assigned seats. Participants were first briefly instructed orally about the tasks to be performed, and then they received written information and instructions. The instructions included a short statement of purpose: "An experiment of economic decision making".

After stating the purpose, the instructions continued with describing the procedure and the rules of the experiment. Every matched pair of students was provided with exactly the same description of the experiment. All players were informed that they had been matched with a student from the other university. The family name of the person with whom they were matched was written in ink on the decision page. For practical and administrative reasons, the trust game experiment was conducted in a reverse manner; that is, first the trustees were approached and then the trustors. This was possible since the strategy method was used. 11 Therefore, in the first stage of the experiment, the participants at the University College of Södertörn were approached. Participants were told that they had been matched with a student at Växjö University, and they both received SEK100 for participating in the experiment. Further, trustees were told that while they could pocket their money, their counterparts, trustors, had the opportunity to decide whether or not they wanted to transfer any portion of their money to them. Trustees were told that the experimenter would triple the amount trustors transferred to them. So, if the trustor chose to send SEK90, he or she would receive an amount equal to SEK270. At the time, it was not yet known how much trustors would transfer. Therefore, trustees were asked to decide how much of the tripled amount, if anything at all, they would like to send back to the trustor for each and every possible sum transferred by the trustor. Given that the sum of money the trustor could transfer was restricted to multiples of 10, trustees were asked to decide how much, if anything at all, they would like return to the trustor in ten convincible cases. Trustees were told that their transaction would end the trust game and that they would be paid on the scheduled day when the trustors' decisions are gathered and payoffs are calculated. When trustees had made their decisions, they were told that they would be participating in another game, the dictator game, but their role in this game would be passive. 11 This method was first proposed by Selten (1967). Rather than observing the participant's behavior in only those nodes a player reaches, the strategy method asks for a decision of the participant in every node of the game. There are both advantages and disadvantages of the strategy method; see Roth (1995). Most importantly, the advantage was the possibility of observing participants' entire strategies, while a drawback is that participants were forced to think about behavior in each node which could lead to different outcomes than if the game had been played in an ordinary manner. To avoid potential misunderstandings, extensive written and oral information was provided. They were provided with the same information and same description of the trust game as the trustees. According to the game, they were asked to decide whether or not they would like to transfer any amount to the trustees. When the trustors' decisions were made for the trust game experiment and transfer forms had been collected, decision pages for the dictator game were distributed. In the dictator game experiment, dictators were randomly assigned to a different person than in trust game. This experiment consisted of only one stage in which dictators were told that the experiment was being conducted, again in pairs, and that they were already matched with another student. The name of the person with whom they were matched was written in ink on the transfer form. The participants were then asked to send some, all, or none of their additional SEK100 to their counterpart.

At both universities, after the decisions were made and forms were collected, all participants completed a questionnaire containing demographic questions, including the players' gender, age, years in school, major area of study, and most importantly, their foreign background, from which we categorized different ethnic groups.

Cash was the only incentive offered. The counterparts to the missing players received the average payoffs of the total population.

Results

We summarized the results by considering separately the decisions made by trustors, trustees, and dictators. As mentioned in the previous section, seven trustors from Växjö University had non-Swedish backgrounds. These are excluded in the statistical analysis below. The analysis is, therefore, based on the remaining 84 pairs of players. However, Exact randomization technique was employed to test the differences in mean.

The Fisher exact probability test was used for 2×2 contingency tables to analyze differences in proportions. For measures of association, Spearman's rank-order correlation test based on 10,000 Monte Carlo samples was used. All p-values were reported for two-sided tests. 12 We first start by discussing the behaviour of the trustors presented in Table 1.

The transferred amounts are out of SEK100; therefore, the numbers in the tables can also be interpreted as the average percentage transferred. Rows in both tables identify trustors' gender and the columns indicate the trustees' ethnic type. The average transfer by trustors was 59 percent of the total amount. Men transferred on average 55 percent and women 62 percent of the total amount. The main question is whether or not coplayers with foreign backgrounds received significantly lower transfers than Swedish co-players. If so, then the following null hypothesis should be rejected: Swedish trustees and trustees with foreign backgrounds receive, on average, equal transfers from trustors.

[Table 1 about here] The average amount sent appears to be affected by the ethnic affiliation of the trustee, mostly when coming from male trustors. In particular, men transferred on average 64 percent to Swedish trustees and only 48 percent to European trustees. The corresponding average percentage of money transferred by men to non-European trustees was 50 percent. For female trustors, the transferred amounts averaged 65, 57, 12 See Siegel and Castellan, Jr. (1988) for an overview of these tests. 13 and 62 percent, when trustees had a Swedish, European, or non-European name, respectively. The results showed that it was primarily the males who tended to discriminate between different groups. Even though the differences in average transfers indicated a discriminatory behaviour against participants with foreign backgrounds, the distribution in different treatments was not significantly different. Hence, the null hypothesis cannot be rejected. In total, transfers to Swedish trustees averaged 64, while transfers to European and non-European B-players averaged 51 and 57, respectively.

The average transfers in different treatments are not significantly different at conventional levels of significance. 13 [Table 2 about here] Trustworthiness is measured as the proportion returned by the trustee of the tripled amount received from the trustors. The proportions returned by trustees who received strictly positive amounts from trustors are tabulated in Table 2. Rows in this table identify the B-players' genders, and the columns indicate their ethnic type.

Looking at the whole sample of trustees, the average return to trustors was 40 percent of the amount received. The question in this part of the game is whether or not different ethnic groups differ in their strategic behaviour. The null hypothesis is that average proportions from trustees back to trustors did not depend on the trustees' ethnic backgrounds. 2 shows that Swedish female trustees who received strictly positive amounts from trustors returned, on average, 37 percent of the amount received. The average proportion returned by European and non-European female trustees, respectively, was 39 and 46 percent. Swedish men returned on average 41 percent, while European and non-European men, respectively, returned 46 and 36 percent. The highest proportion returned, 46 percent, was by European men and non-European women. All differences between various pair-wise comparisons were not statistically significant. Hence, the null hypothesis that the distribution of transfers from trustees to trustors was independent of the trustees' ethnic backgrounds cannot be rejected. 14 Let's turn to the results for the dictator game. Since trustors in the trust game also played the role of dictators in the dictator game, we first tested whether there were any significant relationship between the amounts sent by players in the trust game and the amounts sent in the dictator game. The Spearman's correlation test found a slightly positive relationship between the amounts sent. The correlation coefficient is r = 0.1727, but the coefficient is not statistically significant.

[Table 3 about here]

The results for the dictator game are presented in Table 3. Rows in Table 3 identify the dictators' gender, and columns indicate the recipients' ethnic type. Looking at the whole sample of participating participants, the average transfer was 27 percent of the total amount. 14 Trustees where also asked to state the amount of money they expected their counterpart to send them. There were no significant differences in expectations among different groups. The question is whether or not recipients with foreign backgrounds received lower amounts than Swedish recipients from the dictators. In that case, the null hypothesis that recipients with different ethnic affiliations received the same amount is rejected. The results show that the average transfer from male dictators was 26 percent when the counterpart had a Swedish name and 27 percent when the counterpart had a European name, while the corresponding amount to a recipient with a non-European name was only 9 percent. The amount received by recipients with non-European names was significantly lower than the amount received by recipients with Swedish names (p = 0.0732), and recipients with European names (p = 0.0329). On the other hand, female dictators transferred similar amounts in different treatments: on average, 35 percent to Swedish, 29 percent to European, and 29 percent to non-European counterparts. The slight difference between amounts received by Swedish and non-Swedish recipients from female dictators is not significant.

The average transfer from all dictators to Swedish recipients was 31 percent, while the average transfer to European and non-European recipients was 28 percent and 20 percent, respectively. Non-European recipients received, on average, a significantly lower amount than Swedish recipients (p = 0.0789).

The second experiment

In the following experiment, we replicated the dictator game. We had two purposes with this: First, to investigate to the robustness of the result found in the previous dictator game experiment, as the difference between the amount donated to Swedish and non-European participants was significant but only on a 10 percent level of significance.

Second, we wanted to investigate whether the discrimination found in the dictator game F o r P e e r R e v i e w 16 was systematic in the sense that not only Swedish people discriminate against foreign people but also foreign people themselves discriminate against other foreign people.

Experimental design

The design in the following experiment is slightly different from the design in the first experiment. As an alternative of focusing on specific ethnicity, we only signalled whether a co-player was foreign or not. We did this by recruiting participants from Swedish for Immigrants (SFI) classes and from social sciences classes at the adult secondary schools in Alvesta and Växjö. Hence, we did not expose participants' names at all. Instead, we exposed only to which class they belonged. We will, from now on, refer to participants from SFI as foreign participants and to participants in social sciences classes as Swedish participants. The experiment was conducted on different occasions in 2006. Both Swedish and foreign participants were assigned the role of the dictator, and both types of participant were paired with either a Swedish or a foreign participant.

The recruitment was carried out directly in classes before a scheduled lecture.

Students were informed that they had the possibility of participating in a study immediately after their lecture, and to appreciate their participation they would be treated with a cup of coffee (actually they received SEK10 that they could use to buy coffee or whatever they liked). Additionally, they were told that they had the possibility of earning up to SEK100 in the experiment. Those students who wanted to participate in the experiment simply stayed after their lecture.

A total number of 236 students participated in the experiment: 116 were foreign and 56 of these were men, and 120 were Swedish and 49 of these were men. The average age of foreign and Swedish participants was 28 and 27 years, respectively. instructed orally about the tasks to be preformed and then they received written information and instructions. The instructions included a short statement of purpose, which stated: "An experiment of economic decision making".

After stating the purpose, the instructions continued by describing the procedure and the rules of the experiment. All participants were informed that they would be matched with another person. Participants were told that they had to decide how to divide SEK100 between themselves and their co-player. Participants were told to carefully think about their decision since one person in each session would be randomly selected and be paid according to his or her decision. The participants were then asked how much of SEK100 they would like to give their counterpart. After the decisions were made, the forms were collected. The forms also included questions about participants' genders and ages. After collecting the decision forms, one person in each session was randomly selected to realize the experimental outcome.

Participants were in one of two treatments. In the first treatment group, participants were told that they had been matched with another person in an SFI class.

In the second treatment group, participants were told that they had been matched with another person in a social science class. This information was given both in the written instructions and orally. Other than this, all other information was identical in both treatments. The results for the replication are presented in Tables 4 and5. Table 4 tabulates the results for Swedish dictators and Table 5 the results for foreign dictators. Rows in the tables identify dictators' genders and the columns identify the recipients' ethnic type.

Let's start by studying the behaviour of Swedish dictators. Looking at the whole sample of Swedish dictators, the average transfer was 18 percent of the total amount.

[Table 4 about here] The first question is whether or not foreign recipients received lower amounts than Swedish recipients from the dictators. In that case, the null hypothesis that foreign and Swedish recipients received the same amount is rejected. The average transfer from all Swedish dictators to Swedish recipients was 23 percent, while the average transfer to foreign recipients was only 14 percent of the total amount. Hence, foreign recipients received almost nine percentage points less than Swedish recipients, a difference that is statistically significant (p = 0.003).

A closer look shows that the average transfer from Swedish male dictators was 21 percent when the recipient was Swedish and only 9 percent when the when the recipient was foreign. The amount received by foreign recipients was significantly lower than the amount received by Swedish recipients (p = 0.007). Swedish female dictators transferred 24 percent to Swedish recipients and 17 percent to foreign recipients. This difference is only weakly significant (p = 0.120). Hence, as in the previous experiment, discrimination seems to be concentrated among males, even though there is an indication that Swedish female dictators also discriminated against foreign recipients. Next, the question is whether foreign dictators themselves discriminate against foreign recipients, or if foreign dictators discriminate against Swedish recipients. If this were the case, the null hypothesis that Swedish recipients and foreign recipients would receive equal amounts from foreign recipients is rejected.

[Table 5 about here] Table 5 shows that, overall, foreign dictators gave on average 9 and 8 percent of the total amount to Swedish and foreign recipients, respectively. Thus, it seems like there is a systematic discrimination against foreigners. However, the small difference is not statistically significant. A closer look at the gender level reveals that there are some minor differences in amounts received by foreign and Swedish recipients. However, all these differences are statistically insignificant.

General discussion

The purpose of this study was to study ethnic discrimination by using laboratory experiments. First, the study investigated how the information about co-players' surnames affected the behaviour of players in two games: the trust game and the dictator game. So how important are the characteristics that indicate that an individual has a foreign background? How did the information about co-players' surnames affect players' behaviour? What is in a surname? At the first sight, the average amount sent by trustors to trustees seems to be affected by trustees' backgrounds in the trust game. However, the differences were not statistically significant. Hence, the conclusion is that information about trustees' surnames did not influence the behaviour of trustors in the trust game. The result of amount received from the trustor. The results indicated that there were no considerable differences between different groups of trustees. In the dictator game, similar amounts were sent by female dictators to different groups of recipients. However, male dictators sent a significantly lower amount to recipients with non-European backgrounds compared with recipients with a Swedish backgrounds and European backgrounds.

Let us compare the results of the first experiment with Fershtman and Gneezy (2001). In contrast to Fershtman and Gneezy, who found very strong evidence for discrimination in the trust game, this study found no significant discrimination in this game. In another contrast with Fershtman and Gneezy (2001), the present study found discriminatory behaviour in the dictator game. Yet an interesting observation by both Fershtman and Gneezy (2001) and the present study is that discrimination was a male phenomenon. It was only men who discriminated in these experiments.

A limitation of the first experiment is that it only studied the behaviour of dictators with Swedish backgrounds with recipients of different ethnic affiliations. Even if this case were the most interesting to study, since foreigners still are a small minority in Sweden, it motivated the second experiment that investigated the behaviour of individuals with foreign backgrounds toward other individuals with foreign backgrounds. This type of investigation gave us the possibility of studying whether discrimination is systematic or not (i.e., whether individuals with foreign backgrounds themselves discriminate against other individuals with foreign backgrounds). Also, the dictator game results of discrimination in the first experiment called for a replication.

The results of the replication study supported the first experiment; that is, recipients with foreign backgrounds received, on average, lower amounts than Swedish recipients. Note: Number of participants in each cell is given in parenthesis. The proportion is calculated as the amount trustees returned divided by three times the amount trustors sent. Since ten trustors sent zero amounts to their counterparts, the total number of trustees who received strictly positive amounts is 74.

  significant discrimination against co-players with foreign backgrounds. The results for the dictator game, however, showed a statistically significant discriminatory behaviour by men against co-players with non-European backgrounds.

  , the next section discusses discrimination in the experimental games used in this study. Sections 3 and 4 present the first and second experiment, respectively, and Section 5 concludes.

  , significantly lower amounts sent to recipients with foreign backgrounds are an outcome of tastes, since recipients do not have any strategic role in this game.

  former university contains a high rate of foreigners. Thus, it was possible to conduct an experiment with actual matching of players with different ethnic affiliations.The participants from Växjö University were assigned the role of trustors, and participants from University College of Södertörn were given the role of trustees in the trust game. In the dictator game, participants from Växjö University were assigned the role of the dictators, and participants from University College of Södertörn were given the role of the recipients. Hence, each participant from Växjö University played the role of both trustor and dictator, whereas each participant at University College of Södertörn played the role of both trustee and recipient. The matching in the dictator game was different from that of the trust game.

  at Växjö University who had the role of trustor were approached.

  to add the fact that the results and conclusions of the experiment do not radically change by including the (excluded) seven participants.

  conducted with foreign participants, and four sessions were conducted with Swedish participants. Each session lasted approximately ten minutes, and a single experimenter conducted all sessions. Participants were first briefly

  as the proportion returned by trustees of the tripled

  gender effect was also found in the second experiment. However, we found no evidence pointing at systematic discrimination of individuals with foreign backgrounds.

Table 1 :

 1 The average amount sent by trustors Note: Amounts sent are out of SEK100. Number of participants in each cell is given in parenthesis.

		Type of trustee
	Gender of trustor Swedish	European	Non-European Total
	Female	64.76 (21) 56.67 (9) 62.00 (15) 62.22 (45)
	Male	63.53 (17) 47.50 (12) 50.00 (10) 55.13 (39)
	Total	64.21 (38) 51.43 (21) 57.20 (25) 58.93 (84)

Table 2 :

 2 The average proportion returned by trustees

		Type of trustee
	Gender of trustee Swedish	European	Non-European Total
	Female	36.68 (19) 39.42 (9) 45.88 (9) 39.58 (37)
	Male	40.81 (15) 45.83 (8) 35.65 (14) 39.95 (37)
	Total	38.50 (34) 42.44 (17) 39.65 (23) 39.76 (74)

Table 3 :

 3 The average amount sent by dictators Note: Amounts sent are out of SEK100. Number of participants in each cell is given in parenthesis.

		Type of recipient
	Gender of dictator Swedish	European	Non-European Total
	Female	34.76 (21) 29.00 (10) 29.29 (14) 31.78 (45)
	Male	25.56 (18) 27.00 (10) 9.09 (11) 21.28 (39)
	Total	30.51 (39) 28.00 (20) 20.40 (25) 26.91 (84)

Table 4 :

 4 The average amount sent by Swedish dictators Note: Amounts sent are out of SEK100. Number of participants in each cell is given in parenthesis.

		Type of recipient
	Gender of dictator Swedish	Foreign	Total
	Female	23.51 (37)	17.06 (34)	20.42 (71)
	Male	21.20 (25)	8.75 (24)	15.10 (49)
	Total	22.58 (62)	13.62 (58)	18.25 (120)

Table 5 :

 5 The average amount sent by foreign dictators Note: Amounts sent are out of SEK100. Number of participants in each cell is given in parenthesis.

	Page
		Type of recipient
	Gender of dictator Swedish	Foreign	Total
	Female	10.00 (30)	8.00 (30)	9.00 (60)
	Male	8.51 (27)	7.93 (29)	8.21 (56)
	Total	9.30 (57)	7.66 (59)	8.62 (116)

25 of 25 Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript

[START_REF] Bouckaert | Inter-ethnic trust and reciprocity: Results of an experiment with small businessmen[END_REF] is another study that is related to the present study. They conducted a trust game experiment, but in the field instead of the laboratory. They did not find any discriminatory behavior.

See, for example, Holm (2000),Saad and Gill (2001a, 2001b),[START_REF] Solnick | Gender differences in the ultimatum game[END_REF], and[START_REF] Eckel | Chivalry and solidarity in ultimatum games[END_REF]. Eckel and Grossman (to be published) gave an excellent overview of experiments with gender in focus.

In the post-experimental questionnaire, trustors where asked to state the amount of money they expected their counterpart to send back. There were no significant differences in expectations between different groups. However, it is important to point out that this analysis was done on individuals who had sent positive amounts. Of course, those players who did not send anything did not expect anything in return.

Acknowledgements

The author would like to thank Karl-Markus Modén, Ebba Hallsenius, and Johanna Sturesson for their help during the experiment. The author would also like to thank James Albrecht, Fredrik Andersson, Lars Behrenz, Fredrik Carlsson, Jan Ekberg, Fredrik Hansen, Håkan Holm, Susanna Holzer, Håkan Locking, Jonas Månsson, Marcus Selart, and seminar participants at Växjö University, Karolinska Institutet, Göteborg University, and the AMER and Swedish Institute for Emigration Symposium on Research in International Migration for valuable comments.