investment and market dominance we analyze a model of oligopolistic competition with ongoing investment special cases include incremental investment patent races learning by doing and network externalities we investigate circumstances under which a firm with low costs or high quality will extend its initial lead through investments to this end we derive a new comparative statics result for general games with strategic substitutes which applies to our investment game finally we highlight plausible countervailing effects that arise when investments of leaders are less effective than those of laggards or in dynamic games when firms are sufficiently patient

a new look at the returns and risks to pharmaceutical r d this study investigates the returns to r d for 100 new drugs introduced into the united states during the decade of the 1970s in contrast to prior studies it incorporates several significant structural changes that have occurred in the pharmaceutical industry during the 1980s these include higher real drug prices and a greater degree of generic competition a major finding is that the return on r d for the average new drug is approximately equal to the 9 percent industry cost of capital however the performance of new drugs introduced during the latter half of the 1970s was markedly better than that of early 1970s introductions this latter finding is consistent with the more rapid rate of industry growth in real r d expenditures the study also finds that the variation in returns is highly skewed with only the top 30 drugs covering mean r d costs on a fully allocated basis finally it is shown that real drug price increases in the 1980s were necessary for the average new drug introduction to recover its r d costs

looking for hysteresis in coal consumption in the us abstract this paper estimates an unobserved components model to explore coal consumption in the usa we ask whether coal consumption exhibits hysteresis defined as a dynamic structure in which the cyclical component of coal consumption has permanent effects on the natural component in contrast to previous analysis we provide evidence in favor of hysteresis in coal consumption by using the nonlinear framework proposed recently by perez alonso and di sanzo 13 in which threshold type nonlinearities are introduced by allowing past cyclical consumption to have a different impact on the natural component depending on the regime the article discusses implications of the findings for energy conservation policies

non cooperative and cooperative climate policies with anticipated breakthrough technology abstract global warming can be curbed by pricing carbon emissions and thus substituting fossil fuel with renewable energy consumption breakthrough technologies e g fusion energy can reduce the cost of such policies however the chance of such a technology coming to market depends on investment we model breakthroughs as an irreversible tipping point in a multi country world with different degrees of international cooperation we show that international spill over effects of r d in carbon free technologies lead to double free riding strategic over pollution and underinvestment in green r d thus making climate change mitigation more difficult we also show how the demand structure determines whether carbon pricing and r d policies are substitutes or complements

adverse selection and moral hazard with risk neutral agents abstract this paper surveys some recent developments of the literature on adverse selection and moral hazard in agency problems it is concerned with the case where both aspects coexist and both agents are income risk neutral it shows that in most cases the moral hazard aspect does not entail welfare losses compared to the pure adverse selection case it moreover analyses different ways using a single contract or a family of contracts of deriving the optimal contracts from the optimal pure adverse selection solution

an r d race with knowledge accumulation i develop a model of an r d race with knowledge accumulation my model does not inherit the memorylessness property of the exponential distribution that troubles existing models of r d races hence firms knowledge stocks are no longer irrelevant to their behavior during the r d race and knowledge accumulation has strategic implications in this more general setting i obtain results that stand in marked contrast to the previous literature in particular under some conditions the firm that is behind in the race engages in catch up behavior this pattern of strategic interactions action reaction is consistent with empirical research copyright 2003 by the rand corporation

revisited are shocks to energy consumption permanent or temporary new evidence from a panel suradf approach abstract this paper explores whether the hypothesis of energy consumption stationarity is supported in different regions the stationarity properties indicate that the impact of a reduction in energy consumption or a realignment policy is only temporary and over time the series will revert back to the trend path this paper first applies the panel seemingly unrelated regressions augmented dickey fuller panel suradf test developed by breuer et al breuer j b mcnown r wallace m s 2001 misleading inferences from panel unit root tests with an illustration from purchasing power parity review of international economics 9 3 482 493 which allows us to account for possible cross sectional effects and to identify how many and which members of the panel contain a unit root the main conclusion is that the stationarity of energy consumption will be affected by the differences among the five regions made up of 84 countries during the period 1971 2003 similar conclusions are reached when we analyze country groups based on levels of development moreover the results reveal that conventional panel unit root tests can lead to misleading inferences which are biased towards stationarity even if only one series in the panel is strongly stationary lastly some policy implications emerge from our results

industry and firm specific factors of innovation novelty this article investigates the underlying factors that might shape the firm s choices with respect to degrees of innovation novelty using a sample of 2983 firms observed under the portuguese community innovation survey we assess the relative relevance of a set of firm and industry specific factors in explaining firms choices about incremental or radical innovation the results indicate that both the firm s idiosyncratic historical factors giving rise to heterogeneous r d capabilities and the industry context have power to shape the firm s innovation choices even though firm specific factors appear to be more powerful the estimated impacts on firm s innovation novelty are nonetheless significantly moderated by the type of firm and industry

endogenous formation of coalitions in a model of a race abstract this paper examines the endogenous formation of coalitions among symmetric firms who are racing to innovate a new product or process the probability of success depends on a coalition s research intensity which in turn depends on the r d of member firms forming joint ventures allows firms to maintain a higher research intensity and increase their probability of success we characterize the equilibrium coalition structure when the innovation is drastic as well as non drastic and examine its variation with respect to input spillovers and imperfect appropriability of benefits we also compare equilibrium and efficient coalition structures

efficient division of profits from complementary innovations abstract many products including microprocessors telecommunications devices computer software and on line auction services make use of multiple technologies each of which is essential to make or sell the product the owner of one technology benefits from the existence of complementary technologies we show that despite this externality the structure of payoffs that support efficient r d investment by duopolists racing to discover a single innovation generalizes to the structure that supports efficient investment for complementary innovations the paper also examines how alternative intellectual property regimes and legal institutions affect r d investment in complementary technologies the results have policy implications for the organization of r d the assessment of damages for patent infringement and allocations of value in patent pools

are fluctuations in coal consumption per capita temporary evidence from developed and developing economies abstract this paper investigates the unit root properties of coal consumption per capita for the 47 developed and developing countries for 1965 2010 period to examine the stationary properties of coal consumption per capita lagrange multiplier lm unit root test with one break and two breaks crash model has been utilized according to empirical results the coal consumption is stationary in almost all the countries analyzed thus if the coal consumption is mean or trend reverting then it follows that the series will return to its mean value or trend path and it might be possible to forecast future movements in the coal consumption based on past behaviors of the series for the policy makers it is not necessary to pay attention to coal consumption excepting for indian and italian however for the researchers it is important to take into account the stationarity property of coal consumption and also structural breaks should be modeled in their future studies

asymmetric all pay auctions with incomplete information the two player case abstract we prove existence and uniqueness of bayesian equilibrium for a class of generally asymmetric all pay auctions with incomplete information due to its importance in applications some prominence is given to the first price all pay auction for which a detailed characterization of equilibrium and an approximation to equilibrium of its well studied complete information version are supplied furthermore we relate our uniqueness result to the well known multiplicity of equilibria in the war of attrition second price all pay auction which emerges as a limit point of the class of two player auction games considered journalof economic literature classification numbers d44 c62 c72

taxes and financial frictions implications for corporate capital structure abstract according to data from compustat we observe three general trends between 1980 and 2012 first firms have been reducing their reliance on debt as leverage ratios have fallen and an increasing fraction of firms are now actually net lenders second the frequency at which firms neither issue external equity nor distribute dividends to shareholders has fallen third marginal corporate income tax rates have fallen significantly as well using compustat balance sheet data we structurally estimate a model in which heterogeneous firms finance investment with equity and debt our model incorporates costly external finance as well as a detailed tax structure including personal dividend and corporate income taxes we conclude that there has been a significant reduction in the cost of external equity while overall leverage ratios have fallen mainly because of a lower tax advantage of debt

are shocks to disaggregated energy consumption in malaysia permanent or temporary evidence from lm unit root tests with structural breaks abstract the objective of this paper is to examine whether energy consumption in malaysia disaggregated by sector and type is stationary or contains a unit root to realize our objective we apply the lagrange multiplier lm family of unit root tests with up to two structural breaks depending on the decision rule for selecting between results in the no break one break and two break cases we find that energy consumption is stationary for between 50 per cent and 70 per cent of the disaggregated energy series and between 25 per cent and 50 per cent of sectors implications for the malaysian government s attempts to reduce fossil fuel consumption are discussed

racing with uncertainty and strategic interaction between competitors as the race unfolds most of the existing literature examines one or other of these features but not the two combined our aim is to see how the efforts of competitors in a race vary with the intensity of rivalry between them in our principal model whch is of a one dimensional race it is shown that the leader in the race makes greater efforts than the follower and efforts increase as the gap between competitors decreases under certain conditions the same results hold in our second related model which is of a two dimensional race

patent races and the persistence of monopoly patent races are important determinants of market structure for a new firm a patent can be an entry ticket into the market for an incumbent firm already in the market patents for related technologies can ensure that no new firm enters in this spirit recent work has explored the implications of patenting for the persistence of monopoly see for example dasgupta i982 gilbert i98i gilbert and newbery i982 much attention has been given to pre emptive patenting the strategic acquisition of patents by an incumbent firm solely to prevent potential rivals from entering the market in this context it is important to distinguish between two kinds of patent race a standard race is a competition in which a prize is awarded to the first player to reach the finishing line an asymmetrical race is a competition in which one player loses something of value if one of his rivals reaches the finishing line he is content if nobody wins but a prize is won by the first of the other players to reach the finishing line if any of them does so a patent race in which an incumbent firm s sole concern is to prevent potential rivals from entering his market is an asymmetrical race and not a standard race the distinction between the two kinds of race can be captured only in models with a sufficiently rich dynamic structure this and other advantages of a properly dynamic model are explained in section ii a model of an asymmetrical race with two firms is presented in section iii in this model the challenger wins a prize and the incumbent loses a prize if the challenger is first to reach the finishing line it is shown that the challenger is often automatically deterred from making any effort to win the race because the strategic interactions between the players are such that the incumbent would outdo any reasonable effort made by the challenger in order to stop the challenger being first to reach the finishing line then the incumbent has no need to make any effort in the race in order to maintain his existing monopoly the reason is that the incumbent unlike the challenger does not need to go all the way to the finishing line to achieve his objective on the other hand it may be truedepending on the parameters describing the firmsthat the challenger wins the patent proceeding to the finishing line just as if he were the only contender for the patent of particular interest is the case in which the firms are identical

asymmetric outcome in a symmetric dynamic duopoly abstract in a dynamic duopoly will an initial asymmetry between firms increase or decrease over time we examine this issue within a stochastic dynamic alternate move duopoly model that explicitly accounts for action and reaction between firms we consider two firms that are symmetric with regard to all primitives such as demand cost and production functions and which are subject to the same stochastic environment the only asymmetry is with regard to their initial capital stocks which in turn asymmetrically influences their current and future profit and investment possibilities we offer a characterization of the stochastic steady state and its supporting ergodic set for each firm we are then able to identify the precise restrictions on the initial conditions under which the two firms either converge or diverge in the long run

hysteresis in unemployment after two decades of ratcheting unemployment in europe most economists agree that structural changes associated with higher equilibrium rates of unemployment have occurred but the direction of causality is a matter of controversy have the structural changes caused the long lasting increases in actual unemployment or have the increases in actual unemployment caused the structural changes the latter possibility is often referred to as hysteresis during the past decade a distinct research program has evolved around the idea that equilibrium employment tracks actual unemployment this survey reviews the various hysteretic explanations offered in the literature and evaluates their empirical standing

a model of the evolution of duopoly does the asymmetry between firms tend to increase or decrease this paper is an attempt to identify some of the factors that affect the evolution of market structure in a model of dynamic competition between two firms the stochastic evolution of the state of competition depends on the respective effort rates of the firms the question is whether the current leader works harder than the laggard does the gap between firms tend to increase or decrease we show that several effects are at work the state tends to evolve in the direction where joint payoffs are greater since joint payoffs are related to joint product market profits less joint effort costs there are two classes of effect the joint profit effect and various joint cost effects the latter result in part from the pattern of profits and in part from endpoint effects that give relief from efforts asymptotic expansions illuminate these influences moreover we show by numerical simulation that there is another kind of joint cost effect the pattern of joint effort costs can influence the pattern of evolution of market structure and the evolution of the pattern of market structure can influence the pattern of efforts in a mutually self reinforcing manner in particular there may be equilibria in which this last effect means that the laggard works harder than the leader even though all the other effects work in favour of the leader

estimating the natural rate of unemployment and testing the natural rate hypothesis how should one measure the natural rate of unemployment this paper proposes a systems procedure as an alternative to nairu the natural rate is treated as an unobserved state variable in a system that includes measurement equations for the unemployment rate the rate of wage growth and the rate of inflation the model is derived from a version of the wage bargaining model of blanchard and embodies a version of the natural rate hypothesis the model is estimated by embedding the kalman filter within the full information maximum likelihood procedure for us data the estimated model implies substantial post war variation in the natural rate and a negative but weak effect of inflation surprises on unemployment copyright 1999 john wiley sons ltd

an empirical test of the asymmetric models on innovative activity who invests more into r d the incumbent or the challenger the theoretical discussion concerning the question whether the incumbent or the potential entrant invests more into r d has attracted considerable interest this paper reports the results of an empirical study on this question using data of about 3500 german firms over the years 1992 to 1995 the survey explicitly asks the firms for their motives to undertake innovative activity it is thus possible to take account of intended not just completed market entry it turns out that the challenger invests more into r d in order to enter a new market than the incumbent thus the patent racing model by reinganum and others seems to characterize innovative activity more accurately than the competing auction model of gilbert and newbery we use a heteroscedastic tobit as well as a tobit model with selectivity in order to deal with the econometric problems of double censoring

are fluctuations in oil consumption permanent or transitory evidence from linear and nonlinear unit root tests abstract this paper examines the integration properties of the total oil consumption in 57 countries for the period of 1965 2012 a combination of new and powerful linear and nonlinear stationarity tests are employed to achieve the objectives of the study we find that the oil consumption series in 21 countries follow a nonlinearity path while those in the other countries are linear in nature evidence of the presence of a unit root is found for the total oil consumption series in 38 countries while the series is stationary in the remaining 19 countries an important insight is that the blueprints that were designed to reduce oil consumption are likely to have a permanent effect in most of the countries

a patent race in a real options setting investment strategy valuation capm beta and return volatility abstract in this paper we study financial properties of r d intensive firms through a continuous time real options patent race model numerical analysis in this study shows that intense competition drives a firm to invest more aggressively which then pushes up its cost of capital and return volatility while introducing negative return correlation with its competitor furthermore we find that a firm s position in competition has important impacts on its financial properties for instance a firm s cost of capital is a non monotonic function of its relative position in the race in addition the relationship between cash flow uncertainty and investment can be negative when a firm is far ahead or far behind or positive when firms are close in the race

a dynamic duopoly investment game without commitment under uncertain market expansion abstract we model capacity building investments in a homogeneous product duopoly facing uncertain demand growth capacity building is achieved through the addition of production units that are durable and lumpy and whose cost is irreversible while building their capacity over time firms compete a la cournot in the product market given their installed capacity there is no exogenous order of moves no commitment regarding future decisions and no finite horizon we investigate markov perfect equilibrium mpe paths of the investment game which may include episodes during which firms invest at different times a preemption pattern and episodes in which firms invest simultaneously a tacit collusion pattern these episodes may alternate and are typically several when firms have yet to invest in capacity the sole pattern that is mpe compatible is a preemption episode firms invest at different times but have equal value the first such investment may occur earlier and therefore be riskier than socially optimal when both firms hold capacity tacit collusion episodes may be mpe compatible firms invest simultaneously at a postponed time hence holding back production in the meantime thereby generating an investment wave in the industry such investment episodes are more likely with higher demand volatility faster market growth and lower cost of capital discount rate

accounting for the corporate cash increase abstract why do u s firms hold much more cash now than they did 40 years ago i construct a partial equilibrium model of firm dynamics where cash provides a buffer against persistent and transitory cash flow shocks in the presence of costly external finance i find that 57 of the increase in cash holdings of small public firms can be accounted for by the observed decrease in the correlation between revenue and operating expenses the decrease in the correlation between revenue and expenses is then decomposed and explained the model has a corresponding correlation parameter between the shocks on revenue and expenses and allows for the possibility of negative cash flows negative cash flows are frequently observed in the data and the frequency has a significant impact on optimal cash holdings finally a lower corporate tax rate and cash restrictions are imposed on the model as policy experiments

do prediction markets aid defenders in a weak link contest abstract laboratory experiments have demonstrated that prediction market prices weakly aggregate the disparate information of the traders about states moves of nature however in many practical applications one is attempting to predict the move of a strategic rival this is particularly important in aggressor defender contests this paper reports an experiment where the defender may have the advantage of observing a prediction market on the aggressor s action the results of the experiments indicate that the use of prediction markets does not increase the defender s win rate prediction markets contain reliable information regarding aggressors decisions that is not being exploited by defenders and the existence of a prediction market does not alter the behavior of the aggressor whose behavior is being forecast

a perpetual race to stay ahead this paper presents a model of dynamic competition between two firms that repeatedly engage in an innovative activity the state of competition measured by the difference between the number of innovations introduced by the firms evolves stochastically according to their effort level the structure of markov perfect equilibria is identified it is generally not true that competition is fiercest when firms are closest rather firms invest under two distinct circumstances while sufficiently ahead to outstrip their rival and secure a durable leadership while behind to regain leadership and prevent the situation from worsening to the point where their rival outstrips them industry such a market structure cannot be adequately modelled by a repeated game since history obviously affects market opportunities more precisely previous outcomes determine the range of available actions and pay offs economists have thus resorted to the study of races to gain insights into the strategic issues raised by such competition with the notable exceptions of aoki 1991 harris 1991 and budd harris and vickers 1993 most of the literature has analysed formal races displaying exogenous finishing lines or deadlines as well as final prizes and rewards and the corresponding results rely on backward induction however such assumptions do not seem to capture accurately the essential features of many markets often the rivalry only ends if at all when one of the competitors withdraws so that the deadline should be endogenized moreover benefits and losses are continuously collected additionally the emerging empirical literature on races stresses the inadequacy of standard models and the need to model r d as a race with multiple prizes in the words of cockburn and henderson 1994 our finding that the modern game theoretic literature is of only limited usefulness as an empirical guide points to the need to model r d as a race with multiple prizes the model analysed in this paper is an attempt to offer an adequate framework for this type of dynamic competition the stochastic evolution of the state of competition between two firms depends on their respective effort levels the state of competition is measured by the

preemption in r d races abstract fudenberg gilbert stiglitz and tirole 1983 consider a patent race in which each firm s instantaneous probability of discovering a patentable invention is an increasing function of its cumulative expenditure on rd in particular we show that for intermediate values of it is possible for the follower to spoil the race by forcing the leader to drop out

a new approach to energy consumption per capita stationarity evidence from oecd countries abstract applying a new panel stationary test procedure to data from 32 oecd countries from 1971 to 2013 this study examines the time series properties of per capita energy consumption the results indicate that energy consumption per capita follows a mean reverting process for 16 oecd countries whereas for the remaining 16 oecd countries a mean reverting process is not the case besides energy consumption per capita exhibits some sharp and smooth structural shifts breaks in its mean and or trend levels and the endogenously identified break dates correspond to specific macroeconomic events such as oil crises gulf war asian and global financial crises these results also have important policy implications for the 16 oecd countries that have stationary energy consumption per capita series government policies intended to stabilize energy demand will have no long lasting effects and therefore governments should not adopt unnecessary policy targets for energy demand level however for the remaining 16 oecd countries such policies will have long lasting effects

patents imitation and licensing in an asymmetric dynamic r d race abstract rd some may have an advantage in early stages of the r d process while others may have advantages in other stages of the process this paper uses a two firm asymmetric ability multistage r d race model to analyze the effect of patents imitations and licensing arrangements on the speed of innovation firm value and consumers surplus by using numerical analyses to study the mpe of the r d race the paper demonstrates the circumstances under which a weak patent protection regime that facilitates free imitation of any intermediate technology may yield a higher consumers surplus and total surplus than a regime that awards a patent for the final innovation the advantage of imitation may hold even when we allow for voluntary licensing of intermediate technologies

inertia risk improving economic models of catastrophes we model endogenous catastrophic risk in a new way we call it inertia risk which accounts for delays between physical variables and the hazard rate a characteristic often observed in reality the added realism significantly affects optimal policies relative to the standard model of catastrophic risk the probability of a catastrophe occurring at some point in time can span the entire interval 0 1 and is not 0 or 1 as is typical in standard models inertia risk can also generate path dependences we illustrate the implications for policy in a simple model of climate change

applied econometrics and implications for energy economics research abstract developments in applied econometrics particularly with regard to unit root tests and cointegration tests have motivated a rich empirical literature on energy economics over the last decade this study reviews recent developments in time series econometrics applications in the energy economics literature we first consider the literature on the integration properties of energy variables we begin with a discussion of the implications of whether energy variables contain a unit root and proceed to examine how results differ according to the specific unit root or stationarity test employed we then proceed to examine recent developments in the literature on cointegration granger causality and long run estimates between disaggregated energy consumption and economic growth we review both single country and panel studies and pay particular attention to studies which have expanded the literature through adding variables such as financial development and trade in addition to energy consumption to the augmented production function as well as studies which have extended the literature through examining disaggregated energy consumption by type in each case we highlight best practice in the literature point to limitations in the literature including econometric modeling challenges and suggest recommendations for future research a key message of our survey is that the profession needs to guard against overload of research in these areas as most applied studies are no longer adding anything more to what is already known

optimal r d investment strategies under the threat of new technology entry abstract this paper studies the r d investment decisions of a firm facing the threat of new technology entry the r d project is subject to technical uncertainty the incumbent can successfully prevent entry by innovating however in an entry deterrence situation the resulting monopoly is different from a monopoly without an entry threat because potential competition means that the monopolist completes the r d project which it otherwise would not have done greater technical uncertainty stimulates initiating exploratory r d and can result in implementation of more expensive research projects this is a result of the limited downside risk of the project it does not matter whether the outcome of an initial r d stage is disappointing or very disappointing since in both cases the firm will simply abandon the project the welfare analysis shows that the threat of entry may reduce welfare in case of entry deterrence

is energy consumption per capita broken stationary new evidence from regional based panels abstract for the first time a new panel unit root testing procedure developed by 51 carrion i silvestre et al 2005 breaking the panels an application to gdp per capita econometrics journal 8 159 175 is applied to re investigate the stationarity of energy consumption per capita for 7 regional panel sets covering the 1971 2002 period with structural breaks and cross sectional correlations introduced into the model it becomes clear that all regional based panels of energy consumption per capita are stationary the structural breakpoints identify the likely causes of major changes in energy consumption in the past the findings underscore the importance of accounting for exogenous shocks to a series and offer several important implications for policy makers and energy economists

firm asymmetries and sequential r d theory and evidence from the mainframe computer industry we incorporate strategic considerations into the analysis of a problem that has hitherto been treated in a decision theoretic fashion the allocation of scarce r d resources when r d proceeds in stages in doing so we formalize a notion of system complexity and investigate its implications for the allocation of these scarce resources using detailed data from fieldwork at all mainframe manufacturers in the world to investigate our theoretical predictions we provide evidence that larger market share firms set more aggressive stage targets as do more resource rich firms our results can be seen as a verification of the mechanism underlying arrow s replacement effect

innovation threats and strategic responses in oligopoly markets this paper deals with the strategic reaction of firms to competitive threats stemming from newly developed products of actual competitors product innovation projects go through multiple time consuming stages with several continuation termination decisions hence competitors can react to the threat before the new product is introduced and thereby may prevent or facilitate the product s introduction we consider a duopoly model where firm 1 can start a two stage product innovation project for obtaining a horizontally and vertically differentiated product in between the two stages firm 2 can react by making an investment that improves the competitive position of the current product we find that under weak vertical differentiation firm 2 wants firm 1 to innovate horizontal differentiation softens competition and firm 2 over invests to induce firm 1 to launch the new product second under strong vertical differentiation firm 1 starts the product innovation project triggering under investment by firm 2 but never finishes it the under investment makes firm 2 a weaker competitor which induces firm 1 not to innovate third under very strong vertical differentiation firm 2 prevents a launch of the new product by over investing this results in a strong competitive position of firm 2 it therefore captures such a big market share that firm 1 will not introduce the new product the situation of firm 1 in the old market has worsened the option to complete the innovation created by initiating the first stage of the innovation project has a negative value for firm 1

non cooperative and cooperative responses to climate catastrophes in the global economy a north south perspective the optimal response to a potential productivity shock which becomes more imminent with global warming is to have carbon taxes to curb the risk of a calamity and to accumulate precautionary capital to facilitate smoothing of consumption this paper investigates how differences between regions in terms of their vulnerability to climate change and their stage of development affect the cooperative and non cooperative responses to this aspect of climate change it is shown that the cooperative response to these stochastic tipping points requires converging carbon taxes for developing and developed regions the non cooperative response leads to a bit more precautionary saving and diverging carbon taxes we illustrate the various outcomes with a simple stylized north south model of the global economy

invention under uncertainty and the threat of ex post entry abstract this article proposes a theoretical framework for studying the invention of new products when demand is uncertain in this framework under general conditions the threat of ex post entry by a competitor can deter invention ex ante asymmetric market power in the ex post market exacerbates the problem the implications of these general results are examined in a series of examples that represent important markets in the computer industry the first is a model that shows how an operating system monopolist by its mere presence can deter the invention of complements to its own detriment as well as that of society the implications of policies such as patent protection price regulation and mandatory divestiture are considered three additional examples consider the ability of a monopolist in one market to commit to bundling an unrelated product a pair of horizontally differentiated firms that can add a new feature to their products and a platform leader that can be challenged in its base market by the supplier of a complementary product

will policies to promote renewable electricity generation be effective evidence from panel stationarity and unit root tests for 115 countries abstract this study examines whether policies to promote renewable electricity generation are likely to be effective by applying panel unit root and stationarity tests to time series data on renewable electricity generation for 115 countries over the period 1980 2008 we find that for the panel as a whole and almost three quarters of the individual countries renewable electricity generation is characterized by a unit root this result implies that policies to promote renewable electricity generation such as renewable portfolio standards which result in annual increases in renewable energy and as such which represent permanent positive shocks to the long run growth path of renewable electricity generation will be more effective in increasing renewable electricity generation than policies with a pre specified time horizon

technology ladders and r d in dynamic cournot markets abstract motivated by dramatic and unpredictable technological advances in energy production for instance drilling and extraction of shale oil we extend cournot models of competition to incorporate research and development rd for example the potential of future monopoly can spur r d investment now even if the firm is presently uncompetitive and not actively producing we also show that surprisingly random innovations have an ambiguous effect on r d this feature which is driven by the cournot framework contrasts with the common situation whereby uncertainty lowers innovation and delays r d investments finally we demonstrate that increased competition may actually increase efforts to innovate through higher desire to achieve dominance this would match the anecdotal evidence that the threat of market entrants forces incumbents to maintain high r d

patent competition rent dissipation and the persistence of monopoly the role of research budgets abstract the paper investigates how patent rights can contribute to the persistence of monopoly patent competition is modelled as a dollar auction game between two firms incumbent and entrant any bid expenditure on r d in the game constitutes sunk cost whose total amount is constrained by fixed research budgets the explicit solution subgame perfect equilibrium determines who wins the patent and how the winning expenditures depend on order of play and budgets of firms the entrant can win if he moves first and has the higher budget rent may or may not be dissipated by the competition

r d competition versus r d cooperation in oligopolistic markets with evolving structure this paper considers investment behavior of duopolistic firms subject to technological progress it is assumed that initially both firms offer a homogeneous product but after a stochastic waiting time they are able to implement a product innovation production capacities of both firms are product specific it is shown that firms anticipate a future product innovation by under investing if the new product is a substitute to the established product and higher profits and over investing in case of complements and lower profits compared to the corresponding standard capital accumulation game this anticipation effect is stronger in the case of r d cooperation furthermore since due to r d cooperation firms introduce the new product at the same time this leads to intensified competition and lower firm profits right after the new product has been introduced in addition we show that under r d competition the firm that innovates first overshoots in new product capacity buildup in order to exploit its temporary monopoly position taking into account all these effects the result is that if the new product is neither a close substitute nor a strong complement of the established product positive synergy effects in r d cooperation are necessary to make it more profitable for firms than r d competition

a closer look at the returns and risks of pharmaceutical r d this study assesses the profitability of researching and developing new chemical entities nces a 36 year investment horizon is projected based on a survey of r d costs and on extensive u s sales data analysis is after taxes the average nce produces a real internal rate of return of 6 1 and a net present value of 76 million in 1976 dollars break even with an opportunity investment in corporate bonds occurs on average after 12 years of sales risk is apparent in that after 24 years of sales some two thirds of nces return no more than the bonds do the median nce not recovering average r d costs produces a negative return alternative assumptions are tested results are highly sensitive to drug price increases and early replacement by generics

scale economies the value of time and the demand for money longitudinal evidence from firms compustat data on 12 000 firms for the years 1961 92 indicate that large firms hold less cash as a percentage of sale than small ones whether comparisons are made within or across industries the clasticity of cash balance with respect to sales is about 0 8 firms headquartered in counties with high wages hold more money for a given level of sales a finding consistent with the idea that time can substitute for mony in the provision of transactions services the estimates are consistent with both scale economies in the holding of money and secular declines in velocity

is monthly us natural gas consumption stationary new evidence from a garch unit root test with structural breaks we apply a recently developed unit root test that simultaneously accounts for heteroskedasticity and structural breaks to united states monthly natural gas consumption we find that united states monthly natural gas consumption is stationary our results illustrate the importance of accounting for heteroskedasticity when testing for a unit root in energy consumption with higher frequency data

diverging trends in aggregate and firm volatility this note documents the diverging trends in volatility of the growth rate of sales at the aggregate and firm levels we establish that the upward trend in firm volatility is not simply driven by a compositional bias in the sample studied we argue that this new fact brings into question the proposed explanations for the decline in aggregate volatility and that given the symmetry of the diverging trends at the micro and macro levels a common explanation is likely we conclude by describing one such theory

dropout behavior in r d races with learning we examine a game theoretic model of a two firm r d race in which expenditures on r d and the concomitant increase in experience learning enable thefirms to increase their probability of discovering an invention the learning process is stochastic it generates a unique subgame perfect equilibrium for identicalfirms with the characteristic that the leader never drops out but the follower drops out if the leader gains a significant lead the leader can find it optimal to drop out if the firms value the invention differently or have different r d efficiencies thus our analysis generates results between vigorous competition and natural monopoly central to schumpeter s 1934 vision of entrepreneurship are the extraordinary profits associated with innovation the lure of these profits fuels the fires of creative destruction as innovators replace declining firms this article analyzes the competition for the profits obtained by bringing an innovation to fruition and receiving the associated patent we restrict attention to the subclass of innovations known as inventions innovations that are the product of a firm s research and development in particular we are concerned with the conditions that cause a firm after having invested in r d to drop out of the competitive race situations in which the leading firm drops out are of even greater interest competition in r d is often modelled as a race in which the winner receives a patent and reaps most or all of the benefits of the invention as exemplified by kamien and schwartz 1972 the early theoretical literature tended to be based on decision theoretic models the firm seeks an optimal rate of expenditure on r d determined in part by the expected value of the invention the extent of the first mover advantage the economies or diseconomies of scale in r d and the perceived intensity of rivalry it is not anticipated that the firm s decisions will affect the r d efforts of the perhaps unknown rivals kamien and schwartz 1982 p 124 show that the firm does no research if rivalry is sufficiently intense because their model is static however it is never the case that a firm enters the race and then drops out

privatization in theory and practice privatization george yarrow this paper examines the theoretical and empirical case for private versus public ownership privatization usually leads managers to place greater emphasis on the pursuit of profits however whether this is beneficial to society depends on the trade off between possible market failures due to a lack of competition and deficiencies in government control of public firms the competitive and regulatory environment is more important than the question of ownership per se in competitive markets there is a presumption in favour of private ownership where there is a natural monopoly vigorous regulatory action is required the evidence suggests that privatization has led to improved performance by firms such as the national freight corporation and cable and wireless which operate in a relatively competitive environment the benefits are less clear in the case of firms like bp britoil and british aerospace however the most worrying case is that of british telecom and the projected privatization of british gas where little thought has been given to limiting the abuse of monopoly power rather the regulatory environment has been tailored to the needs of the existing management and to ensuring a successful share flotation privatization is also advanced as a weapon for reducing trade union power encouraging wider share ownership redistributing wealth and improving the public finances however there are other policy instruments better suited to achieving these objectives the existing privatization programme has not led to a marked widening of share ownership and has resulted in windfall gains to a small group of investors at the expense of taxpayers in general

endogenous asymmetry in a dynamic procurement auction we show how to numerically solve for a markov perfect equilibrium of a dynamic auction game where a procurer repeatedly purchases construction services from capacity constrained firms we find that the procurer is best off scheduling frequent auctions for small project sizes otherwise firm capacity utilization rates become larger and more asymmetric which softens competition and increases procurement costs we also find that forward looking bidding dampens the competition softening effects of asymmetry farsighted firms compete more intensely than myopic ones this can undermine the goal of a bid preference style affirmative action program more farsighted firms respond less to the asymmetry induced via bid preferences

speculative profits innovation and growth when technological change affects the prices of tradeable assets innovators can obtain speculative profits by exploiting their inside information as to the occurrence of innovations we propose a tractable model of endogenous growth that formalizes this argument originally due to hirshleifer 1971 we then use the model to assess two claims advanced by hirshleifer namely that speculative profits can generate excessive investment in r d when they add to monopoly rents guaranteed by patent protection or else even in a perfectly competitive economy the analysis confirms the first claim but casts doubts on the second one jel o30 o40

some evidence on hysteresis in unemployment rates abstract we propose an unobserved components model to evaluate unemployment data for evidence on hysteresis effects unemployment is decomposed into a natural rate component assumed to be nonstationary and a cyclical component assumed to be stationary hysteresis effects are modelled by allowing lagged cyclical unemployment to affect the current natural rate the model is estimated using canadian german u k and u s unemployment rate series we find substantive hysteresis effects in the canadian german and u k unemployment series hysteresis effects in the u s unemployment series are negligible

venture capital financed investments in intellectual capital abstract the paper considers a new company in the it industry founded by a management team and partially financed by venture capital among the questions that the paper addresses are how much venture capital should be acquired to help finance the development of the firm how should a wish to grow with the aim of making a breakthrough in the it area be balanced against the stockholders wish to consume the problem is studied as an optimal control problem with a random time horizon and we derive a series of prescriptions for investment and financial decisions

are shocks to energy consumption permanent or temporary evidence from 182 countries this article applies univariate and panel data unit root tests to annual panel data for 182 countries over the period 1979 2000 to examine the stationarity properties of per capita energy consumption the univariate unit root test can only reject the unit root null for 56 countries or 31 of the sample at the 10 level or better however univariate unit root tests have low power with short spans of data and therefore failure to reject the unit root null should be treated with caution when we apply the panel data unit root test we find overwhelming evidence that energy consumption is stationary we discuss the policy implications of these findings and offer suggestions for future research

real options valuation for a biotechnology company many companies in the biotechnology industry have significant valuations despite having no product revenue because their products are in early stages of development in the past 10 15 years investors have bid up the stock prices of companies showing promise of developing a blockbuster drug we explain the decision tree method and binomial lattice method which adds a growth option and use them to value a biotechnology company agouron pharmaceuticals as the sum of the values of its drug development projects the growth option was added because the development of an initial new molecular entity nme is similar to purchasing a call option on the value of a subsequent nme we compare our computed values of agouron with actual market values at selected points in time during the development of agouron s viracept a drug used to treat hiv positive patients

inflation and the evolution of firm level liquid assets abstract this paper shows that inflation has been an important determinant of firm level liquid asset holdings liquid assets as a share of total assets the cash ratio for u s corporations steadily declined from the 1960s to the early 1980s and has since steadily increased our empirical analysis finds that inflation is a key factor accounting for these changes we show that these liquid asset holdings are imperfectly hedged against inflation hence changes in inflation alter the real value of a firm s liquid asset portfolio causing them to readjust these balances

a stochastic competitive r d race where winner takes all the paper considers a race among multiple firms that compete over the development of a product the first firm to complete the development gains a reward whereas the other firms gain nothing each firm decides how much to invest in developing the product and the time it completes the development is a random variable that depends on the investment level the paper provides a method for explicitly computing a unique nash equilibrium parametrically in the interest rate for a given interest rate the nash equilibrium is determined in time that is linear in the number of firms the structure of the solution yields insights about the behavior of the participants furthermore an explicit expression for a unique globally optimal solution is obtained and compared to the unique nash equilibrium

are shocks to natural gas consumption temporary or permanent evidence from a panel of u s states abstract this short communication examines whether or not u s natural gas consumption follows a stationary process unlike previous research that has focused on regional country or industrial sector based panel studies this study undertakes a sub national investigation of natural gas consumption for the 50 u s states levin et al 2002 im et al 2003 maddala and wu 1999 and hadri 2000 panel unit root and stationarity tests reveal that natural gas consumption is integrated of order one however once allowance is made for endogenously determined structural breaks the carrion i silvestre et al 2005 im et al 2005 and westerlund 2005 panel unit root and stationarity tests indicate that natural gas consumption is integrated of order zero discussion of the structural breaks is briefly surveyed in relation to the natural gas industry s response to legislative actions

returns to r d on new drug introductions in the 1980s abstract this study finds that the mean irr for 1980 1984 u s new drug introductions is 11 1 and the mean npv is 22 million 1990 dollars the distribution of returns is highly skewed the results are robust to plausible changes in the baseline assumptions our work is also compared with a 1993 study by the ota despite some important differences in assumptions both studies imply that returns for the average nce are within one percentage point of the industry s cost of capital this is much less than what is typically observed in analyses based on accounting data

product innovation incentives by an incumbent firm a dynamic analysis we employ a dynamic framework to study how product innovation activities of a firm are influenced by its investments in production capacity of an established product and vice versa the firm initially has capacity to sell an established product additionally it also has the option to undertake an r d project which upon completion allows the firm to introduce a new vertically and horizontally differentiated product to the market thereby extending its current product range the breakthrough probability of detecting the new product depends on both the value of the firm s r d stock and its current r d investment it is shown that the initial production capacity for the established product influences the intensity of r d activities of the firm in particular there are constellations such that for large initial production capacity for the established product the firm never invests in r d and the new product is never introduced for small initial capacity the firm keeps investing in r d implying that eventually the new product is always introduced finally for an intermediate range of initial capacity levels the firm initially invests in product r d but then reduces these investments to zero in this scenario the new product is introduced with a positive probability which is however substantially smaller than 1 from a technical perspective this analysis gives the example of a new type of skiba threshold phenomenon in the framework of a multi mode optimization model

are fluctuations in energy consumption per capita transitory evidence from a panel of pacific island countries this study applies the panel stationarity test developed by carrion i silvestre et al 2005 breaking the panels an application to gdp per capita econometrics journal 8 159 175 to examine the stationarity of energy consumption per capita for a panel of 13 pacific island countries over the period 1980 2005 this test has the advantage that it allows for multiple structural breaks at unknown dates that can differ across countries and can account for all forms of cross sectional correlation between countries the conclusion from the study is that energy consumption per capita in approximately 60 of countries is stationary and that energy consumption per capita for the panel as a whole is stationary the study offers several suggestions for modelling energy consumption and policy making in the pacific islands

firms asset holdings and inflation expectations abstract this paper investigates the relationship between firms inflation expectations and their holdings of liquid assets we implement a new quantitative survey of firms expectations about inflation in new zealand we find that firms that hold more shares of liquid assets systematically report lower inflation expectations moreover we implement an experiment by providing firms new exogenous information about recent inflation dynamics this experiment allows us to assess how firms respond to new information in terms of belief revisions and firm level decisions

persistence of technological leadership emerging technologies and incremental innovation in a model of competitive innovation i derive theoretical conditions for an entrant to displace the incumbent firm by innovating in an undeveloped substitute emerging technology the main result presents conditions on profitability and innovation speed that yield a markov perfect equilibrium in which the entrant pursues the emerging technology while the incumbent chooses to persist with the established technology and collect short run profits notably this result does not require the entrant s superiority to the incumbent for innovation finally when the model is calibrated to hard drive industry data its predictions are consistent with the observed outcomes

dynamic competition in technological investments an empirical examination of the lcd panel industry abstract when are technological laggards more likely to try to catch up with leaders we offer empirical evidence on firm level data of plant investments in the tft lcd panel industry where technological competition has been intense and dynamic we find that the followers level of technology has a non monotonic effect on technology improving investments with intermediate followers the most apt to invest in catch ups this result is a puzzle given the existing theory on technology race we also find that followers catch up investments increase with the capacity of the leader that employs the state of the art technology these results are robust to variations in specification and alternative accounts of effects we discuss our findings and contributions in light of the technology race literature

why put all your eggs in one basket a competition based view of how technological uncertainty affects a firm s technological specialization conventional wisdom suggests that when a firm faces technological uncertainty it responds by becoming less technologically specialized so as to remain adaptable to subsequent resolution of this uncertainty we adopt a competition based view of technological uncertainty to identify an opposite effect in competitive settings the firm may instead become more specialized when faced with greater technological uncertainty so as to focus on advancing its technologies against competition and influence the resolution of uncertainty in its favor over rivals we propose that this effect is accentuated when the firm expects that it cannot easily adapt to rivals technologies subsequently specifically when rivals are a greater deterrent through being litigious or innovative using u s government funding for fuel cell research as a policy shock with stock option implied volatilities to measure expected uncertainty we find empirical support for our propositions among firms active in research and development in the u s communications equipment industry through these findings we demonstrate that a competition based view of uncertainty identifies an alternative path for the firm s resource accumulation under uncertainty and we stress that the resolution of uncertainty can be something the firm attempts to influence rather than adapt to

dynamic r d competition the authors study a simple two stage stochastic patent race involving two firms they examine the behavior of the participants as they gain the lead or fall behind in the race the authors find that the leader engages in rd 2 a policy of issuing patents for intermediate research results and 3 the effects of research joint ventures whereby the firms coordinate their initial research efforts and share their results copyright 1987 by royal economic society

risk premia and preemption in r d ventures i analyze the impact of competition on the risk premia of r d ventures engaged in a multiple stage patent race with technical and market uncertainty after solving in closed form for the case of a two stage race in continuous time i show that a firm s risk premium decreases as a consequence of technical progress and increases when a rival pulls ahead compared to the case where firms collude r d competition erodes the option value to mothball a project reduces the completion time and the failure rate of r d and causes higher and more volatile risk premia numerical simulations reveal that competition can generate risk premia up to 500 annual basis points higher and up to three times more volatility than in a collusive industry

profit rates and intangible capital a central question in industrial organization is why profit rates differ so dramatically across firms and industries one of the many explanations offered for this phenomenon is the failure of conventional accounting methods to adjust for intangible capital stocks i e it is argued that profit rates do not differ dramatically when capital stocks are correctly calculated to include intangible r d and advertising capital to test this hypothesis individual advertising capital stocks are calculated for firms in the toys distilled beverages cosmetics and pharmaceuticals industries and r d stocks are calculated for the pharmaceuticals firms the adjustments do not eliminate the wide dispersion in profit rates copyright 1991 by mit press

corporate liquidity in games of monopoly power cr oss sectional variation in corporate liquidity within a sample of large u s corporations suggests that there are material effects from product market competiti on the empirical evidence is consistent with an oligopolistic model wherein liquid assets are employed both to signal commitment to retaliate against market en croachment and to enable firms to rapidly preempt new opportunities as predicted firms with high valuation and spending on intangibles in certain strategic positions hold large stocks of liquid assets copyright 1987 by mit press

will initiatives to promote hydroelectricity consumption be effective evidence from univariate and panel lm unit root tests with structural breaks abstract this paper examines whether initiatives to promote hydroelectricity consumption are likely to be effective by applying univariate and panel lagrange multiplier lm unit root tests to hydroelectricity consumption in 55 countries over the period 1965 2011 we find that for the panel as well as about four fifths of individual countries that hydroelectricity consumption is stationary this result implies that shocks to hydroelectricity consumption in most countries will only result in temporary deviations from the long run growth path an important consequence of this finding is that initiatives designed to have permanent positive effects on hydroelectricity consumption such as large scale dam construction are unlikely to be effective in increasing the share of hydroelectricity relative to consumption of fossil fuels

the tradeoff between performance and quitting in high power tournaments tournaments may be characterized by the performance they induce as well as by the rate of quitting and dropouts of participants although most of the attention in the literature is on the performance induced by high power incentives there are many daily situations in which dropouts and quitting are a major concern using a field experiment in schools and a model of dynamic tournament we examine the effect of different levels of rewards on the rate of quitting our experiment indicates that there is a possible tradeoff between performance and quitting strong incentives tournaments induced participants to exert more effort and exhibit a better performance but at the same time it induces a higher rate of quitting we present a multi stage tournament model that gives rise to a similar characterization jel c93 c73 d8 j30