wall street occupations many finance jobs entail the risk of large losses and hard to monitor effort we analyze the equilibrium consequences of these features in a model with optimal dynamic contracting we show that finance jobs feature high compensation up or out promotion and long work hours and are more attractive than other jobs moral hazard problems are exacerbated in booms even though pay increases employees whose talent would be more valuable elsewhere can be lured into finance jobs while the most talented employees might be unable to land these jobs because they are too hard to manage

keynes uncertainty and interest rates uncertainty plays an important role in the general theory particularly in the theory of interest rates keynes did not provide a theory of uncertainty but he did make some enlightening remarks about the direction he thought such a theory should take i argue that some modern innovations in the theory of probability allow us to build a theory which captures these keynesian insights if this is the right theory however uncertainty cannot carry its weight in keynes s arguments this does not mean that the conclusions of these arguments are necessarily mistaken in their best formulation they may succeed with merely an appeal to risk employment was a problem because investment was and investment was problematic because of the uncertainty of its return shapiro 1997 83 keynes clearly saw an important role for uncertainty in his general theory however few contemporaries agreed with him and subsequent keynesians generally obliterated the distinction between risk and uncertainty in part this was caused by keynes s informal presentation of his views on uncertainty in the general theory this paper has two aims the first is to sketch a formal theory of uncertainty which captures keynes s insights about the risk uncertainty distinction i argue that the theory of imprecise probabilities developed in recent years best captures keynes s intuitions about uncertainty in particular this theory provides a formal distinction between risk and uncertainty and allows for an analysis of keynes s weight of arguments however the second aim is to show that if this is right then keynes was wrong to draw the economic consequences of uncertainty that he did in broad terms i argue that uncertainty is economically impotent it only has effects in conjunction with some other feature of models or the world such as missing markets or agent irrationality but these features plus the existence of risk are sufficient to get the conclusions keynes wants these conclusions of keynes might be right but if so they can be justified without reference to keynesian uncertainty at the end of the day uncertainty is not as economically interesting as it appears

antitrust for high technology industries assessing research joint ventures and mergers the purpose of this paper is to analyze if and how the standard methodology of antitrust analysis should be modified to reflect the importance of r and d and innovation as competitive forces and engines of economic progress focus is on such r and d intensive business combinations as research joint ventures rjvs and horizontal mergers in high technology industries the authors do not propose a complete set of guidelines for the assessment of such combinations they present an economic model of rjvs and high technology mergers that might serve as an analytical underpinning for such guidelines one conclusion of the analysis is that rjvs ought to be accorded special treatment under the antitrust laws this special treatment should entail an explicit recognition that rjvs will be scrutinized under the rule of reason according to guidelines specific to this purpose

a patent system for both diffusion and exclusion public policy analysis of optimal patent regimes is often framed as a tradeoff between static and dynamic efficiency in this analytical framework weak patent protection and strict antitrust policy are taken to be directed toward static concerns while protection of intellectual property through strong patent laws is taken as a reflection of broader social concerns for long run growth and technological progress this characterization has some truth but the magnitude of the conflict between static and dynamic efficiency can easily be exaggerated in this article i want to argue that weak patent protection need not be inimical to economic growth and conversely that strong patent protection need not be an enemy of diffusion appropriately structured patent law and antitrust rules can together ensure incentives for r d and also induce cooperation among firms in diffusing r d results through licensing and other means at the same time cooperation among firms at the r d stage can counterbalance weak patent protection by internalizing spillovers from ongoing r d programs and such cooperation may also produce additional spillovers from the existing knowledge

do subsidies to cooperative r d actually stimulate r d investment and cooperation abstract a popular view in the industrial policy debate is that cooperation among firms r d departments should be encouraged the european community japan and the us all subsidize research cooperatives this study presents the first empirical test of the effectiveness of such subsidies using a database of competitors in 45 technological races the results indicate that subsidies that require cooperation in the form of result sharing agreements significantly increase the likelihood of cooperation but they decrease incentives to conduct r d subsidy programmes such as eureka that require cooperation but do not require result sharing agreements do not increase the likelihood of cooperation they do however increase incentives to conduct r d somewhat about to the same extent as subsidies that do not require cooperation

sharing productive knowledge in internally financed r d contests we examine the optimal design of two stage research and development r d joint ventures at the second stage researchers choose r d effort levels independently in an attempt to achieve an innovation in the first stage researchers have an opportunity to share endowments of productive knowledge initial pecuniary resources are limited so rewards for disclosing knowledge and succeeding at the second stage must be financed from successful innovation we derive conditions under which full sharing of knowledge and the socially desired levels of r d effort can be motivated and examine the optimal incentive structure when this ideal outcome cannot be implemented full sharing will always be motivated at the first stage but inefficient r d effort will be induced to foster information sharing

the role of information sharing in cooperative research and development abstract this paper develops a model in which r d cooperation enables firms to increase the probability of discovering a new product by sharing information about research strategies and outcomes numerical computations of equilibrium show that cooperation tends to increase in the underlying probability of research success total surplus generally increases as more firms cooperate and cooperation in equilibrium never exceeds that which maximizes total surplus however when the probability of an innovation s success is relatively low no cooperation occurs nor will much be socially desired finally self imposed limits on membership in the cooperative entity tend to reduce total surplus

a structural model on the impact of prediscovery licensing and research joint ventures on innovation and product market efficiency abstract using a novel database on prediscovery licensing agreements one type of r d cooperation as well as detailed firm level and semiconductor market specific information we estimate the impact of prediscovery licensing agreements pdlas on innovation and product market efficiency our results show that pdlas reduce innovative activity in the semiconductor industry by 10 percent or 4089 patents throughout the 1989 1999 period on the contrary research joint ventures a different type of r d cooperation increase innovative activity based on a structural model we provide evidence that pdlas increase production costs and semiconductor prices by 1 percent which results in customers paying an additional 1 1 billion for semiconductors per year beyond the common concern that r d cooperations facilitate coordination activities in product markets via price fixing our study highlights that pdlas can be used as an instrument to coordinate r d activities which can reduce innovation activity and increase costs and prices

the stability of joint ventures reciprocity and competitive rivalry the focus of the following empirical analysis is the influence of reciprocity and long term relationships on the stability of joint ventures these cooperative incentives are offset by industry structural conditions which may promote competitive rivalry among the partners to separate these effects on joint venture survival the hypothesized relationships are proxied by variables drawn from industry and questionnaire data and estimated under a hazard model specification a theoretical implication of the findings is to suggest a shift of attention from the transaction to the economic relationship as the unit of analysis copyright 1989 by blackwell publishing ltd

an analysis of cooperative research and development i analyze the effects of cooperative research whereby member firms agree to share the costs andfruits of a research project before they undertake it in this model industrywide agreements tend to have socially beneficial effects when the degree ofproduct market competition is low when there are r d spillovers in the absence of cooperation when a high degree of sharing is technologically feasible and when the agreement concerns basic research rather than development activities i show that a royalty free cross licensing agreement among any number offirms lowers the equilibrium level of innovation even though it increases the efficiency of r d through sharing

inter firm cooperation with imperfectly appropriable research abstract inter firm collaboration in pre competitive research is not always beneficial rather its effectiveness in raising social benefits relative to a non cooperative setup depends on both the nature of the agreement and the technological and market conditions of the industry in question joint ventures that simply allow members to coordinate their actions in pre competitive research can restore firm incentives for both pre competitive research and development in the presence of high knowledge spillovers and poor opportunities for innovation joint ventures which additionally improve the dissemination of information among member firms raise social benefits whenever the opportunities for innovation are not exceptionally good even in the presence of relatively insignificant spillovers

the relationship between r d collaboration subsidies and r d performance empirical evidence from finland and germany this study focuses on the impact of innovation policies and r d collaboration in germany and finland we consider collaboration and subsidies as heterogeneous treatments and perform an econometric matching to analyze r d and patent activity at the firm level in general we find that collaboration has positive effects in germany subsidies for individual research do neither exhibit a significant impact on r d nor on patenting but the innovative performance could be improved by additional incentives for collaboration for finnish companies public funding is an important source of finance for r d without subsidies recipients would show less r d and patenting activity whilst those firms not receiving subsidies would perform significantly better if they were publicly funded copyright 2007 john wiley sons ltd

incentives for cooperative and non cooperative r and d in duopoly abstract this paper tries to explain why duopolistic firms would like to enter cooperative r and d venture even when they would act non cooperatively in the product market we show that both very high and very low probabilities of success in r and d can induce firms to go for r and d joint ventures this research highlights the modus operandi for cooperative research even without and spillover of individual r and d and or with a reasonably low sunk cost of r and d

innovation and cooperation implications for competition and antitrust n k robel laureate robert solow and his colleagues on mit s industrial productivity commission recently noted dertouzos lester and solow 1989 p 7 undeveloped cooperative relationships between individuals and between organizations stand out in our industry studies as obstacles to technological innovation and the improvement of industrial performance and later p 105 that interfirm cooperation in the u s has often though not always been inhibited by government antitrust regulation these striking conclusions warrant further exploration unfortunately industrial organization textbooks still discuss horizontal cooperation and competition almost exclusively in terms of standard cartel theory on the other hand vertical cooperation contracting is viewed differently and some textbooks provide treatments of supplier buyer relationships in which cooperation is viewed as enhancing efficiency both in the textbooks and in policy discussion among economists cooperation among competitors is highly suspect being perhaps the last bastion of what was once referred to as the inhospitality tradition in antitrust as a result very little literature addresses how cooperation among competitors can promote competition notwithstanding that cooperation among competitors may sometimes be essential if innovating firms are to compete in today s increasingly global markets imai and baba 1989 such cooperation is already important in japan and in europe 1

entrepreneurship access policy and economic development lessons from industrial organization abstract this paper explores some relationships between promotion of competition and economic development that arise from the impacts of entrepreneurial firms in this respect two sets of policies are critical for furthering economic development first to arrest the diversion of entrepreneurial talent towards non productive activities an increased emphasis on preserving rewards from productive innovation is needed through the protection of commercial freedom property rights and contracts second given that essential local inputs are vulnerable to monopolization and foreclosure fostering opportunities for grass roots entrepreneurship becomes paramount through a more activist supply side competition policy emphasizing access to essential business services and other required local inputs a key message is that the conventional sensitivity of policy concerns about the social welfare effects of foreclosure should be extended to a domain beyond the usual essential facilities of public utilities it should include access to many other elements of the business infrastructure that are taken for granted in mature market economies but that pose real barriers to productive entrepreneurship at the grass roots level in the context of development additions to the incipient empirical work in this area could yield substantial policy dividends

cournot equilibrium with imperfectly appropriable r d the authors investigate the effects of knowledge spillovers numbers of incumbents and demand characteristics on market equilibria involving either noncooperative firms or a research joint venture firms engage in cost reducing r d before competing in outputs noncooperative r d expenditure is socially suboptimal with convex demand and likely to be so under general demand functions a research joint venture involving all firms in the industry always invests too little relative to the social optimum it may however lead to better market performance than is achieved under the noncooperative regime copyright 1994 by blackwell publishing ltd

economic history and economics i have in the back of my mind a picture of the sort of discipline economics ought to be or at least the sort of discipline i wish it were if economics were practiced in that way there would be nothing problematical about its reciprocal relationship with economic history it would be pretty clear what it is that economic theory offers to economic history and what economic history offers to economic theory i will try to describe what i mean below for better or worse however economics has gone down a different path not the one i have in mind one consequence not the most important one but the one that matters for this discussion is that economic theory learns nothing from economic history and economic history is as much corrupted as enriched by economic theory i will come to that too later on you will notice that i am using strong language i am prepared to admit right away that i may be dead wrong in my judgements but there is no point in pussyfooting bluntness may lead to an interesting discussion after all no one would remember the old german historical school if it were not for the famous methodenstreit actually no one remembers them anyway there must be a lesson in that to get right down to it i suspect that the attempt to construct economics as an axiomatically based hard science is doomed to fail there are many partially overlapping reasons for believing this but since that is not the topic under discussion today i do not have to lay them out in an orderly way i hope the following hodgepodge will convey what i mean a modern economy is a very complicated system since we cannot conduct controlled experiments on its smaller parts or even observe them in isolation the classical hardscience devices for discriminating between competing hypotheses are closed to us the main alternative device is the statistical analysis of historical time series but then another difficulty arises the competing hypotheses are themselves complex and subtle we know before we start that all of them or at least many of them are capable of fitting the data in a gross sort of way then in order to make more refined distinctions we need long time series observed under stationary conditions unfortunately however economics is a social science it is subject to damon runyon s law that nothing between human beings is more than three to one to express the point more formally much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity moreover all narrowly economic activity is embedded in a web of social institutions customs beliefs and attitudes concrete outcomes are indubitably affected by these background factors some of which change slowly and gradually others erratically as soon as time series get long enough to offer hope of discriminating among complex hypotheses the likelihood that they remain stationary dwindles away and the noise level gets correspondingly high under these circumstances a little cleverness and persistence can get you almost any result you want i think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief indeed some of fortune s favorites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices if i am anywhere near right about this the interests of scientific economics would be better served by a more modest approach there is enough for us to do without pretending to a degree of completeness and department of economics massachusetts institute of technology cambridge ma 02139

strategic competition among the few some recent developments in the economics of industry the title of this article is intended as a signal of two things first we are concerned with industries where several but not many firms are actually or potentially in competition with each other thus our topic is competition among the few 1 or oligopoly rather than the polar extremes of textbook perfect competition and pure monopoly secondly we are interested in the strategic nature of competition between firms where the meaning of strategic can be explained as follows if the essence of a game of strategy is the dependence of each person s proper choice of action on what he expects the other to do it may be useful to define a strategic move as follows a strategic move is one that influences the other person s choice in a manner favourable to one s self by affecting the other person s expectations of how one s self will behave schelling 1960 p 150

antitrust policy towards co operative r d ventures this paper surveys the theoretical literature on r d cartels and the empirical literature on problems of appropriability in order to evaluate the case for encouraging antitrust authorities to treat r d cooperative ventures leniently the case for r d cooperative ventures trades potential gains from internalizing technological spillovers off against a possible reduction in output market competition but the empirical evidence suggests that r d spillovers can easily be exaggerated this suggests that the design of antitrust policy towards r d cooperative ventures is likely to be of major importance if they are to yield net social gains and the paper concludes with a critical examination of the ncra introduced in u s and block exemption introduced in europe in the 1980s copyright 1993 by oxford university press

cooperation in r d the case of patent infringement agreements abstract this paper provides an insurance based argument behind patent infringement agreements pia such agreements constitute a form of cooperation in an otherwise non cooperative environment we develop a model where firms initially hold certain patents and undertake further r d by pursuing the latter they face a positive probability of infringing the patents held by the other a prior infringement agreement generates a binding contract so that such infringements would go unpunished if the infringing probability is not too low firms would have incentive to sign an agreement and sacrifice the monopoly option but this depends on the information structure about the patent infringement and search costs such a prior agreement is then compared and contrasted with a suitably designed ex post contract

deficient foresight a troublesome theme in keynesian economics the fact that john maynard keynes had made a distinguished contribution to the theory of probability 1921 no doubt predisposed many of his readers to imbue with great significance his subsequent remarks on the related topic of uncertainty in economic decision making among those who have provided commentaries on his work there are those who have singled out this uncertainty theme not only for its special importance but also for its potential for analytical subversion the purpose of this paper is to scrutinize the ideas involved in this particular aspect of keynes work together with the lines of argument that have emerged from those commentators who have pursued it the result of this scrutiny will be to call into question the idea that there is anything peculiarly subversive in the analytical consequences of broaching problems of uncertainty in economic decision making i shall argue rather that as an analytical issue it is depending on how it is handled either innocuous or else quite indiscriminately destructive

complementary resources and cooperative research a model of research joint ventures among competitors we present a model of research joint ventures in which if firms have highly complementary skills and resources then they prefer to cooperate in areas where the technology is highly appropriable as in applied research the model also indicates that large firms have a greater incentive to cooperate because they are better positioned to capture the benefits of a research venture these findings seem to explain why cooperative research among rival firms in japan has been applied rather than basic and conducted frequently among large companies but firms prefer as small a partner as possible to limit the sharing of research results creating a tension that may make cooperative efforts among rivals difficult to manage for this reason cooperation with organizations such as universities or nonprofit institutions may be a viable alternative for firms looking for complementary skills and resources

the diffusion of new technology and the market for an innovation this article shows that the diffusion of a capital embodied process innovation results from a pattern of decreasing incremental benefits and adoption costs for later adoptions strategic behavior is inessential to this finding we develop a method for comparing diffusion rates for different market structures in the capital equipment market we consider cases with market power on the seller s side of the market and on the buyers side of the market a case with no market power and the welfare optimal case we find that a joint venture adopts an innovation more slowly than other market regimes to protect existing capital investments and that the adoption rate is slower than is socially optimal a monopoly supplier on the other hand adopts at a rate faster than is socially optimal this result is usually also the case when there is no market power finally we show that the monopoly supplier accelerates adoptions faster than in the case where there is no market power but retards later adoptions market power thus makes a difference in diffusion rates and on which side of the market that power lies makes a considerable difference

a technical definition of uncertainty and the long run non neutrality of money ever since knight s 1921 seminal work some economists have drawn a distinction between uncertainty and risk in order to demonstrate that this difference has important implications for understanding the operations of an entrepreneurial economy lawson 1985 is the latest to discuss the need for the analysis of societal interaction 1 in an economic world where uncertainty as opposed to mathematical risk is a pervasive fact of life p 909 lawson correctly associates the concept of uncertainty with the situation where there is no basis whatever upon which to form any calculable probability uncertainty in this account arises when the probability relation is numerically indeterminate and non comparable to other probability relations 1985 p 914

the new institutional economics and the theory of behaviour under uncertainty the new institutional economics nie is diverse in terms of the theory of behaviour under uncertainty some views are close to neoclassical economics but others are similar to those held by heterodox economists distinctions between procedural and substantive uncertainty weak and strong uncertainty and ambiguity and fundamental uncertainty help to identify different approaches to uncertainty in nie regarding the influence of institutions on economics behaviour not all nie focuses on institutions as constraints and takes individuals as given the dominant views of rationality in nie are standard neoclassical maximization and bounded rationality but alternative notions have also been defended