industrial policy and firm heterogeneity our concern in this paper is with firm specific industrial policy when r d subsidies or taxes are differentiated among firms the question arises as to which firms in an industry should receive such support we analyze a situation where firms differ in their r d technologies in two distinct ways in the costs of performing r d activities and in the output obtained from such activities we find that the optimal firm specific industrial policy is affected differently by the two sources of firm heterogeneity furthermore a change in a firm s r d productivity has an ambiguous effect on the optimal policy towards the firm jel classification o31 l52 f13

credible commitment and success with public enterprise reform abstract this paper studies why some efforts at public enterprise reform fail and why others succeed economic reforms are intended to increase efficiency and thus help sustain long term growth yet many governments have had difficulty sustaining the reforms they initiated and have reintroduced rigid controls over markets and enterprises this is because either in the process of implementation the government discovers that the costs of carrying the reform further are greater than the expected efficiency gains or the public is skeptical that the new policies can be sustained and does not take the actions necessary for the gains to be realized this paper develops a new institutionalist framework and employs various measures of policy commitment and net gain from continued reform to analyze these issues the paper suggests ways in which the potential success or failure of a reform can be assessed with implications for the steps that reformers might take to increase the chances of success

inflation and reputation in many macroeconomic models with rational expectations optimal policy is time inconsistent and therefore announced policy may not be credible this paper models the government s credibility explicitly using kreps and wilson s analysis time consistent optimal government policy emerges as a sequential equilibrium in a repeated game this policy is at least as good as the inconsistent optimal policy and dominates the consistent policy when reputational effects are ignored thus the analysis resolves the problem of specifying a credible optimal policy in such models the results show why attempts to disinflate may lead to recession even with perfectly flexible prices this abstract was borrowed from another version of this item

privatization in developing countries a review of the issues abstract the theory and early experience of privatization in developing countries are reviewed privatization has been spurred by widespread dissatisfaction with the performance of public enterprises and the need to cut government expenditures unless it is accompanied by liberalization measures privatization of public enterprises is unlikely to result in significant gains in economic efficiency the sequencing of privatization and liberalization reforms will often determine their impact on efficiency but the correct order of implementation is not clear political opposition to privatization is likely to be limited to the state bureaucracy which will often be able to mobilize in order to limit the impact of reforms early implementation experiences suggest technical difficulties are as constraining as political factors

induced innovation evolutionary theory and path dependence sources of technical change the i960s to the i98os were very productive of new theory and empirical insights into the sources of technical change in the i96os and i970s major attention focused on the implications of changes in demand and relative factor prices on the rate and direction of technical change in the late i 970s and early i980s attention shifted to evolutionary models inspired by a revival of interest in schumpeter s insights into the process of economic development since the early i98os these have been complemented by the development of historically grounded path dependent models of technical change each of these models has contributed substantial insight into the sources of technical change this paper was motivated by a perception that each of the three research agendas is approaching a dead end the three models induced evolutionary and path dependent represent elements of a more general theory that has not yet been invented ruttan 1996 a in a closing comment i suggest some steps toward the development of a more general theory of the sources of technical change

the politics of liberalizing zambia s maize markets abstract this paper discusses the process of agricultural liberalization in zambia the central argument is that maize markets have been more quickly and fully liberalized than maize input markets because the perceived political risks of liberalizing input markets are greater than those of liberalizing maize markets and because economic interest groups benefited from maize liberalization while similar interests benefited from continued government interventions in input markets these finding imply that in order to understand the prospects for economic liberalization in new democracies we must disaggregate both civil society and markets

to reveal or not to reveal strategic disclosure of private information in negotiation abstract within the bargaining literature it is widely held that negotiators should never reveal information that will lead to disclosure of their reservation prices we analyze a simple bargaining and search model in which the informed buyer can choose to reveal his cost of searching for an outside price which determines his reservation price to the uninformed seller we demonstrate that buyers can be made better off by revealing their search cost more interestingly we also find that depending on the assumed distribution of search costs sometimes buyers with relatively low search costs should reveal their private information whereas in other cases buyers with relatively high search costs should do so we then test our model experimentally and find that subjects behavior is not entirely consistent with theoretical predictions in general bargainers behavior is better explained by a bounded rationality model similar to fictitious play

research and development with asymmetric firm sizes this article presents a theoretical model of research and development r d competition among firms the goal of the model is to simultaneously explain two empirical observations pertaining to the persistence of dominantfirms small firms make a disproportionate share of major innovations while largefirms tend to spend more in absolute terms on r d than smallfirms do in the model here firms choose investment levels and r d project riskiness in equilibrium a large firm invests more than a smaller firm but by choosing safer r d projects makes fewer major innovations

targeted export promotion with several oligopolistic industries abstract we study export promotion policies in situations where several oligopolistic industries compete for the services of a sector specific factor of production the partial equilibrium argument for strategic subsidies must be modified to incorporate general equilibrium effects working through the factor market we find that these effects generally weaken the case for profit shifting subsidies in a benchmark case with symmetric exporting industries fixed coefficients technologies and an inelastic supply of the specific factor free trade is shown to be optimal

transferable lessons re examining the institutional prerequisites of east asian economic policies competing theories of east asian economic policy share the assumption that a highly capable coherent economic bureaucracy closely connected to but still independent of the business community has been an essential institutional prerequisite for successful policy formation and implementation in east asia these institutional prerequisites were constructed in a variety of concrete forms with great difficulty and imperfect results as long as the idea of transferable lessons is understood as an invitation to indigenous innovation that takes advantage of the underlying analytical logic of east asian institutions other countries can reap important benefits from east asia s experience

bilateral treaties and the most favored nation clause the myth of trade liberalization in the nineteenth century textbook accounts of the anglo french trade agreement of 1860 argue that it heralded the beginning of a liberal trading order this alleged success holds much interest from a modern policy point of view for it rested on bilateral negotiations and most favored nation clauses with the help of new data on international trade the ricardo database the authors provide empirical evidence and find that the treaty and subsequent network of mfn trade agreements coincided with the end of a period of unilateral liberalization across the world they also find that it did not contribute to expanding trade at all this is contrary to a deeply rooted belief among economists economic historians and political scientists the authors draw a number of policy lessons that run counter to the conventional wisdom and raise skepticism toward the ability of bilateralism and mfn arrangements to promote trade liberalization

cost heterogeneity industry concentration and strategic trade policies abstract we show that if domestic firms do not have identical unit costs then the interplay between the herfindahl index of concentration and the elasticity of the slope of the demand curve is of major importance in the determination of optimal trade policies in some cases the direction of optimal policy is reversed

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

rational expectations and policy credibility following a change in regime we examine the dynamic path of an economy after a change in regime when neither the policy to be followed nor the reactions of the public are known the model is an application of kreps and wilson s reputation model to barro and gordon s macroeconomic policy game equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector it involves mixed strategies and bayesian learning by both sides until the uncertainty about government and public behaviour is resolved the absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation the analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics

optimal asymmetric strategies in research joint ventures abstract this paper identifies an overlooked implication of models of research joint ventures initiated by d aspremont and jacquemin 1988 even though the aggregate r d cost of identical firms in a research joint venture would be lowest if they invested equally to reduce subsequent production costs nonetheless members may often enlarge their overall joint profit by making unequal investments such a strategy raises costs in the investment stage but may create more than offsetting benefits in the production stage since industry profits are larger there when the firms are of unequal size when the consideration leading to asymmetry prevails we find that in contrast to previous work a research joint venture can raise welfare even when there are no spillovers

the role of external search in bilateral bargaining we consider the problem of bargaining between two individuals who can also search for possible alternatives to each other s offers we explicitly incorporate the search activity into the process of bargaining a disagreement in bargaining will lead each individual to search for an outside offer in the hope of improving his future bargaining position and attaining a more favorable outcome we model the interlaced phases of bargaining and search over time as an extensive noncooperative game we characterize the associated subgame perfect equilibrium outcome and strategies finally we show that superior search ability yields an individual a more favorable outcome and hence represents a greater bargaining strength

india and china contrasts in economic liberalization abstract it is argued that in both india and china despite some important differences 1 a similar cultural and political imperatives led to similar systems of dirigisme and economic outcomes with the chinese growth higher than the indian because of higher investment 2 b crises engendered by their dirigiste regimes impelled reform 3 c their attempts to replace the plan by the market have striking similarities but 4 d ultimately because of continuing atavistic attitudes to toward trade and commerce the reforms remain insecure

bargaining and search with recall a two period model with complete information two standard results of previous bargaining models state that delay is generally not expected to occur under complete information and bargaining outcome depends crucially on the bargainers intrinsic characteristics that determine their reservation prices and in general bargainers with better reservation prices tend to get better outcomes this paper considers a bilateral bargaining problem with complete information in which one of the bargainers the buyer is allowed to search while bargaining more importantly we assume that the buyer is allowed to recall past outside offers we find that quite contrary to the standard results of previous complete information bargaining models complete information renders no guarantee for immediate resolution of bargaining and the effect of changing the buyer s search cost on each player s bargaining outcome is unpredictable the major driving force of these two results is the assumption that the buyer can recall past outside offers

a reconsideration of import substitution this paper studies the origins of an import substitution strategy of development summarizes the consequences of that strategy and reviews the problems that led to its failure the fundamental difficulty was its discouragement of the indigenous social learning necessary for sustained independent development the emergence of an outward oriented minimal government strategy is due to the success of korea and taiwan this strategy fails to recognize that social learning requires a strong role for national agents and that this role can be penalized by undue openness an effective strategy must protect and induce domestic learning without penalizing exporting

the political economy of privatization in developing countries abstract privatization in ldcs refers here to the sale or leasing of assets in which the state has a majority interest and the contracting out of publicly provided services privatization is in part a response to the need for fiscal austerity its pace and scope will be determined importantly by the way in which the public sector was built privatization is easier to implement than has been supposed because its austerity and equity costs are relatively small compared to those of broader structural adjustment processes in which it is commonly situated however the payoffs from privatization are relatively small too there is high opportunity cost in time and management for the complicated task of preparing public assets for sale capital market thinness characterizes ldcs and popular capitalism does not appear to be a realistic option in ldcs privatization is likely to be entangled in regional and ethnic conflicts these may be as consequential for formulating and implementing programs as are the critical coalitions that form between economic sectors such as capital and labor or importers and exporters we believe that privatization is not a linear or ineluctable process indeed many privatizations may be implemented in the absence of a commitment to market forces but where the state seeks to redefine the instruments and scope of its interventionism

is firm size conducive to r d choice a strategic analysis of product and process innovations abstract using a duopoly model of multiproduct firms we show that different innovation incentives cause the larger firm to invest more in process cost reducing innovations and the small one to allocate more resources to search for new products because of this heterogeneity of r d behavior the large firm remains dominant for the original product in the post innovation market but the small firm is more likely to be a leader in the new product market these theoretical results are consistent with recent empirical findings

an approximate solution to rent seeking contests with private information abstract we propose an approximate solution to rent seeking contests in which participants have heterogeneous and private valuations the procedure only requires common knowledge about the mean of the distribution of valuations we obtain a closed form expression for an agent s level of investment and subject it to comparative statics analysis we then assess the performance of the model and find that the proposed solution provides a remarkably effective approximation of the optimal solution for a wide range of parameter specifications

up the average cost curve inefficient entry and the new protectionism abstract a two country model is developed in which each country produces one good with increasing returns the goods being perfect or imperfect substitutes with cournot nash behavior and free entry certain restrictive trade policies have effects opposite to their favorable effect under noentry assumptions import tariffs and export subsidies lead to inefficient entry that raises rather than decreases the average production cost of and price charge by the domestic industry with negative welfare consequences we argue that these predictions of our model are closely consistent with extensive canadian data on entry exit and firms responses to trade liberalization

biodiversity conservation in a dynamic world may lead to inefficiencies due to lock in effects and path dependence abstract although biodiversity is generally diminishing in some areas its conservation is expanding however the exact path of this expansion is uncertain this can lead to problems of path dependence and lock in effects path dependence describes situations where history strongly influences present decisions and lock in effects refer to situations where an earlier decision provides strong incentives to follow a particular path even if more efficient alternatives are available later on we develop a conceptual ecological economic model to investigate which ecological and economic parameters favour the appearance of efficiency losses in biodiversity conservation due to path dependence and lock in effects in a dynamic two period two region model generally we find that efficiency losses occur if there are signals that guide the first period budget into a region that later turns out to be suboptimal if both time periods had been considered right from the beginning to illustrate the conservation relevance of our findings we present potential efficiency losses through path dependence in the hypothetical case of applying offsets to conserving the endangered maculinea teleius butterfly near the city of landau in germany

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

the asian debt and development crisis of 1997 causes and consequences abstract interpretations of the asian crisis have coalesced around two rival stories the death throes of asian state capitalism story about internal real economy causes and the panic triggering debt deflation in a basically sound but under regulated system story that gives more role to external and financial system causes the paper presents the stories and assesses the evidence the evidence in particular the chronology of the crisis supports the second rather better than the first the paper discusses the interests driving capital account liberalization without a framework of regulation the single most irresponsible act of public authorities in the whole crisis us and uk financial firms allied with their treasuries and with the imf the wto and the oecd saw themselves at a chronic disadvantage in the asian system of long term relationships and patient capital this alliance supported by segments of asian political and financial elites achieved dramatic domestic financial sector liberalization and capital account opening in asia over the 1990s setting up the conditions for crisis paradoxically the crisis may be looked back upon not as the triumph of benign globalization and neoliberal economic doctrine but as the beginning of its end

strategic r d policy and appropriability abstract the spencer brander argument for strategic rd journal of international economics 1994 36 133 150 that r d subsidies are an optimal policy in the presence of uncertainty

stolper samuelson rybczynski in the pacific real wages and real exchange rates in the philippines 1956 1978 abstract the paper attempts to explain movements of real wages in the philippines in terms of the standard trade theoretic stolper samuelson rybczynski model in view of the factor intensities in the philippines commodities are aggregated into two composite goods traded and non traded whose relative price the so called real exchange rate is shown to have been an important determinant with changes in relative factor supplies of less importance in determining real wages a conventional two sector model is set out which distinguishes between the short and long run effects in terms of the quasi fixity of sector specific capital a simple regression model is estimated and seems to provide a fairly good explanation of what has hitherto appeared to be a puzzling feature of post war philippines economic performance high growth rates of output and employment accompanied by declining real wages in turn being associated with a rising incidence of poverty in at least two periods

the sensitivity of strategic and corrective r d policy in oligopolistic industries abstract we evaluate the case for r d subsidies in export sectors when the outcome of r d is uncertain and the product market is oligopolistic when r d reduces expected costs in the particular sense of first order stochastic dominance a national strategic basis for r d subsidies exists whether firms choose prices or quantities this must be balanced against a corrective incentive to tax r d whenever the number of domestic firms exceeds one however when r d increases the riskiness of the cost distribution as well the results may switch there emerges a strategic incentive to tax and a corrective incentive to subsidize r d

savings investment and the corporation in the east asian miracle abstract the east asian countries have achieved a spectacular average rate of economic growth over the last 30 to 40 years with very substantial diversification and economic development korea for example managed to transform itself from being a largely agricultural society in 1960 to the point where it became the third country after the us and japan to export 256 k memory chips developed by its own firms it is no exaggeration to say that the post wwii development of east asia including japan is the most successful story of sustained economic growth in the history of mankind how does one account for this extraordinary economic success

sectoral conflict over stabilisation policies in small open economies a small open economy is characterized by a two sector model with tradables and non tradables stabilization policies typically have unequal effects on these two sectors and expansion of total output often requires contraction in one sector such situations make difficult obtaining effective consensus on the appropriate stabilization policy expansionary fiscal policy requires a contraction in one sector after the labour market adjusts to the disturbance monetary policy is ineffective under fixed exchange rates and may not have sectoral conflict under flexible exchange rates sectoral conflict can be eliminated by designing policy combinations that maintain a given relative price of nontradables this abstract was borrowed from another version of this item

foreign debt instability an analysis of national saving and domestic investment responses to foreign debt accumulation in 28 developing countries abstract i specify and estimate a foreign debt model that exploits the balance of payments identity current account national saving domestic investment foreign debt can affect both saving and investment behavior in this model if an increase in foreigndebt reduces investment by more than it reduces saving or raises investment by less than it raises saving the current account will eventually be brought into a steady state equilibrium with a sustainable ratio of foreign debt to gnp in such case the debt crisis is more illusory than real for the country sample analyzed here however the buildup of government and government guaranteed foreign debt appears to have produced perverse private sector responses an increase in this type of foreign debt reduces saving by more than it reduces investment hence the current account deficit worsens over time as such foreign debt accumulates dynamic simulations identify only government policy that it raises national saving as an effective way of improving the current account the consequent real depreciation in the exchange rate may increase exporrts and reduce imports sufficiently to cause a current account surplus surprisingly export promotion policies alone seem unlikely to produce any substantial improvement in the current account

when green isn t mean economic theory and the heuristics of the impact of environmental regulations on competitiveness and opportunity cost abstract the conventional neoclassical economic wisdom argues that the opportunity costs of environmental regulations are high with negative implications for costs and profits and by implication for growth and per capita gross domestic product gdp the minority view that environmental controls induce cost offsets that minimise such opportunity costs is marginalised by the conventional wisdom which assumes that economic agents are x efficient in production a behavioral model of the firm is presented in this paper whereby x inefficiency in production prevails even in a world of perfect product market competition that is dominated by rational economic agents in this model environmental regulations affect both the level of x efficiency and the extent of technological change and greener firms can be cost competitive and profitable however private economic agents cannot be expected to adopt green economic policy independent of regulations since in this model there need not be any economic advantage accruing to the affected firms in becoming greener

credibility and reputation building in the developmental state a model with east asian applications abstract we use a game theoretic model to analyze the role of credibility reputation and investment coordination in a developmental state our model focuses on why a soft state serving narrow social groups so often obtains in less developed countries and under what conditions a hard or developmental state can emerge the model highlights the dilemma that although state and private sector alike may want economic growth both must simultaneously invest to achieve it but the equilibrium outcome analogous to the prisoner s dilemma is investment by neither even when initial conditions are favorable and a state is potentially developmental with the genuine capability to elicit private sector investment this may not materialize and an equilibrium of low or no investment will prevail to avoid this deadlock and foster growth the successful developmental state must demonstrate commitment by promoting its developmental credentials through a process of reputation building a consequent incentive to act tough together with seeming advantages of authoritarianism in implementing the developmental state may help to explain why it is often associated with an authoritarian political system

bargaining and search with incomplete information about outside options abstract this paper considers a model of bargaining in which the seller makes offers and the buyer can search at a cost for an outside option the outside option cannot be credibly communicated and the seller s offer is recallable by the buyer for one period there are essentially two equilibrium regimes for sufficiently high search cost the game ends immediately otherwise the search occurs in equilibrium compared to the case where the buyer can communicate his outside option the seller is worse off and the game results in search for a smaller set of values of the search cost i e less equilibrium delay c72

strategic commitment with r d the case of bertrand competition abstract when there is multiplicatively separable demand and firms compete in the price dimension there is no room for strategic use of r d by firms under a different demand situation strategic use of r d by firms competing in the price dimension reduces r d spending reduces output increases price and increases profits of each firm

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

economic history and the modern economist in this book nine economists and economic historians express their concern for the present state of economics and its development in the future from a variety of different approaches these scholars reassert the importance of economic history in the training of economists and urge that this perspective should not be lost in the future

the making of economic policy a transaction cost politics perspective economic policymaking as a political process the normative approach to policy analysis the positive view of political economy a synthesis the policy process in real time a theme transaction costs the transaction cost politics framework political outcomes and economic efficiency transaction cost analysis in politics mechanisms to cope with transaction costs in politics national differences two case studies to illustrate transaction cost politics tax and expenditure reform in the united states the gatt and national trade politics some reflections and suggestions some lessons for the policy process the role of the economist concluding comments appendix multiprincipal multitask agencies

subdividing the commons distributional conflict in the transition from collective to individual property rights in kenya s maasailand summary this paper suggests that explanations of property rights transformation need to move beyond models of relative price change and state enforcement to include accounts that accommodate conflict and competition among actors and the possibility that state actors may not provide the enforcement that is often taken for granted the transition from collective to individualized holdings in kenya s maasailand is burdened with politics and procedural problems that can undermine the gains anticipated in that move moreover in semi arid ecological settings individualization results in unstable land holdings necessitating re contracting and reaggregation by individual parcel owners

the political economy of economic liberalization two of the major policy problems facing governments of developing countries in the 1 980s have been unsustainable external and internal disequilibria and implementation of politically feasible stabilization cum liberalization programs which become necessary to correct these imbalances this article discusses these crises and subsequent policy reform the analysis suggests that balance of payments and fiscal deficits are frequently the result of use of an incorrect accounting system in a fixed exchange rate economy and of public sector expansion beyond its economically feasible size that governments usually seek to liberalize their economies during a crisis to regain control when the growth of the transfer state has led to generalized tax resistance avoidance or evasion that reduction of the government role will be required to alleviate these crises that sharp departures from past policies rather than gradual reform may be politically necessary and that contrary to the current technocratic opinion on this matter the sequencing of a consistent and credible package of reforms which will most effectively reduce the costs of adjustment is initial liberalization of domestic capital markets simultaneous with cuts in the fiscal deficit followed by floating the exchange rate and then commodity market liberalization with the growing importance of internal monetary fund imf stabilization and world bank structural adjustment programs there has been concern about the proper sequencing of the standard stabilization cum liberalization measures contained in these packages in particular there is grave concern at the very mixed and in some cases disastrous effects of liberalization attempts on incomes and employment in the southern cone of latin america in the late 1970s and early 1 980s much of the existing discussion of the order of liberalization is conducted within the traditional technocratic framework which seeks to determine the welfare cost minimizing deployment of policies in the standard stabilization and 1 this assumes a benevolent and well informed government maximizing a social welfare function

the developmental state government and singapore s economic development since 1960 abstract government interventionism is widely acknowledged to characterize less developed countries but consensus is lacking as to whether it promotes economic development and if so how the present article analyzes the nature of government involvement in the singapore model of economic development and emergence of a developmental state closely associated with this model it compares singapore s experience with south korea s and taiwan s where government also contributed to development success and with other asian countries where government failed to play a strong developmental role

international r d rivalry and industrial strategy this paper presents a theory of government intervention which provides an explanation for industrial strategy policies such as r d or export subsidies in imperfectly competitive international markets domestic net welfare is improved by the capture of a greater share of the output of rent earning industries although the subsidy ridden noncooperative international equilibrium is jointly suboptimal behaviour of governments and firms is modelled as a three stage subgame perfect nash equilibrium the assumption that the government is the first player in this game allows it to influence equilibrium outcomes by altering the set of credible actions open to firms

trade liberalization and economic stabilization in mexico lessons of experience abstract this article reviews the mexican trade liberalization of the past decade special attention is paid to the circumstances by which it was triggered to the macroeconomic environment and to the design of the process particularly the speed and extent of the trade reforms it is argued that although far reaching liberalization measures were carried out in a relatively short period of time the exposure of domestic industry to foreign competition was delayed considerably as a result of the exchange rate management during the process

the successful developmental state where does it come from abstract in this paper it is taken for granted that the state has played an important role in the industrialization of east asia accepting this the purpose of the paper is to determine why government policy was so effective in these countries while failing to a great extent in much of the rest of the developing world the key seems to reside in the ability of the state to discipline firms which in turn is dependent upon the credibility of government policy the latter depends on a large number of variables this paper argues that a crucial factor is the size of the domestic market for manufactured goods