new venture survival ignorance external shocks and risk reduction strategies abstract although scholars have long recognized the increased mortality risk that new ventures face in terms of a liability of newness most of the discussion around this risk has been in terms of the contextual constraints that new ventures face and the difficulties that managers have in overcoming them this emphasis is in part a reflection of the perils of newness but also stems from the retrospective and aggregate perspective taken by researchers although the macro level perspective of new venture mortality has made a significant contribution to our knowledge of mortality risk patterns there has been little interest in identifying how venture managers can address the risks that all new organizations face we argue that in order to make progress in explaining new venture survival a theoretical model is required that uses a more micro level perspective to explain new venture failure and the flip side new venture survival in this paper we develop such a model we establish a definition of mortality risk and argue that the liability of newness is largely dependent on the degree of novelty ignorance associated with a new venture novelty is viewed in three different dimensions viz to the market to the technology of production and to management novelty to the market concerns the degree to which the customers are uncertain about the new venture novelty in production concerns the extent to which the production technology used by the new venture is similar to the technologies in which the production team has experience and knowledge novelty to management concerns the entrepreneurial team s lack of business skills industry specific information and start up experience we argue that mortality risk increases with the degree of novelty in each dimension and with the number of dimensions in which the new venture is novel we propose that the decline in mortality risk occurs as the venture s novelty in each of the three dimensions is eroded by information search and dissemination processes this allows the new firm to become an established business and explains what we term the evolutionary path of mortality novelty and risk decline monotonically after a period of adolescence as ignorance decays over time due to passive learning we also propose that there is a strategic mortality risk path that reflects the impact of positive and negative shocks shocks are exogenous events that alter the overall degree of novelty at a point in time positive shocks decrease overall novelty while negative shocks increase overall novelty and reversals endogenous actions that increase the overall novelty of the new venture at a point in time on the mortality risk of a new venture if the incidence and effects of these disruptions can be managed then venture managers may be able to mitigate the mortality risk for their venture we argue that risk reduction strategies can be employed most of which impact on one or more of the dimensions of mortality risk in order to increase the firm s chances of survival a series of risk reduction strategies are proposed and their impact on the determinants of mortality risk is considered

time consistent public policy in this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure we characterize and solve for markov perfect equilibria of the dynamic game between successive governments the characterization consists of an inter temporal first order condition a generalized euler equation for the government and we use it both to gain insight into the nature of the equilibrium and as a basis for computations for a calibrated economy we find that when the only tax base available to the government is capital income an inelastic source of funds at any point in time the government still refrains from taxing at confiscatory rates we also find that when the only tax base is labour income the markov equilibrium features less public expenditure and lower tax rates than the ramsey equilibrium

the influence of guided preparation on the long term performance of new ventures this article further develops a theory of guided preparation and new venture performance and tests its fundamental relationships on a sample of 159 new ventures that received outsider assistance 5 9 years earlier and had been in business for 3 8 years the results suggest that the long term growth of the ventures since start up is significantly related to guided preparation however a curvilinear model rather than a linear model was found to best capture the relationships of interest this suggests that there are diminishing marginal returns associated with guided preparation and that too much may even have a negative influence on performance

rules and discretion with noncoordinated monetary and fiscal policies the time inconsistency of optimal monetary policy is due to the effects of tax distortions thus the issue of how to improve upon the time consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy we present a model with three players the central bark the fiscal authority and wage setters in which distortionary taxes are explicitly modelled we show that binding commitments to monetary rules are not necessarily welfare improving if monetary and fiscal policy are not coordinated we also examine the effects of different degrees of independence of the central bank

the public capital stock needs trends and performance the condition of america s roads bridges mass transit systems and water and sewer facilities has become an issue of increasing controversy one view holds that deterioration of this public infrastructure capital has reached alarming proportions and that a significant fraction of future national savings will be needed to reverse the damage of past neglect another view argues that there has been no sudden acceleration of decay in capital stock performance that better facility management can often substitute for capital investment and that attempts to greatly increase the size and condition of the public capital stock would place unsustainable pressure on financial markets state and local government budgets and the federal system of grants in aid how extensive is the capital infrastructure problem how did it arise given the many federal government subsidies available for state local capital expenditure how much of the national capacity for capital formation should be allocated to solving the problem if there is a divergence between actual and desired infrastructure capital can the gap be closed without disrupting the growth of other sectors and governmental objectives these questions are unfortunately much easier to pose than to answer there is only limited information about the size and condition of the stock of public infrastructure capital and much of the available information has been assembled from the perspective of engineering or planning needs standards needs assessments typically indicate the fraction of the infrastructure stock that falls below a specified and somewhat arbitrary level of performance or indicate how much spending would be required to bring the existing stock up to the specified standard while sometimes appropriate as a management tool infrastructure needs estimates are formulated in isolation from other public and private capital needs and are thus ill suited to the policy debate over national priorities despite significant data problems some general conclusions about the infrastructure dilemma are possible as a backdrop for these conclusions the first section of this paper presents an overview of the historical trends in public sector capital formation and infrastructure condition the following section discusses the factors shaping these trends with particular attention to the supply and demand components of the capital spending decision we then consider the question of whether existing trends will insure an adequate supply of public capital and address the issue of whether a reduced quantity and quality of infrastructure capital may be expected to reduce private sector productivity growth

public debt discretionary policy and inflation persistence we describe a simple mechanism that generates inflation persistence in a standard sticky price model of optimal fiscal and monetary policy key to this mechanism is that policies are implemented under discretion the government s discretionary incentive to erode the real value of nominal public debt by means of surprise inflation renders inflation expectations and in further consequence equilibrium inflation rates highly correlated with the stock of public debt debt in turn is highly persistent allowing for tax smoothing in the face of disturbances due to the aforementioned correlation the persistence in debt carries over to inflation our analysis uncovers a non monotonic effect of nominal rigidities on inflation persistence and shows that government debt under discretion does not display the near random walk property familiar from the ramsey literature a calibrated version of the model that incorporates a moderate degree of monopolistic competition and price stickiness is quantitatively consistent with the inflation dynamics experienced in the usa since the volcker disinflation of the early 1980s

commitment versus discretion in a political economy model of fiscal and monetary policy interaction abstract does price commitment result in lower welfare i pair an independent monetary authority controlling nominal bonds with a fiscal authority microfounded by the political economy model of battaglini and coate 2008 without price commitment time inconsistency is alleviated by interaction between the benevolent monetary authority and the politically distorted fiscal authority with price commitment nominal bonds will be used for wasteful spending by the politically distorted fiscal authority price commitment results in lower welfare because it eliminates monetary control over fiscal decisions

entrepreneurship entrepreneurial training and x efficiency theory abstract a basic motivational component of entrepreneurship is an individual s commitment to overcome gaps and obstacles in imperfect markets research associated with n achievement theory indicates the possibility of the selection and training of potential entrepreneurs and therefore a means to increase the supply of entrepreneurs a tendency to glorify entrepreneurship and the use of a tight equilibrium concept make it difficult to integrate entrepreneurship into standard economic theory despite the desirability of doing so x efficiency theory accommodates a non heroic view of entrepreneurs which in turn allows for the inclusion or entrepreneurial training in the model

congestion function specification and the publicness of local public goods abstract this paper is about the measurement of congestion within the median voter demand framework the model of congestion traditionally used in the literature and four others are compared and tested in a median voter framework the results show that a more flexible functional form which imposes fewer a priori restrictions on the data does at least as good a job of explaining variations in local government expenditures furthermore it is shown that measured publicness of local public goods depends entirely on the a priori restrictions imposed on the congestion function

filling potholes macroeconomic effects of maintenance versus new investments in public infrastructure abstract the maintenance of existing public infrastructure has often been neglected in favor of building new infrastructure in developing countries this paper develops a dynamic general equilibrium model that analyzes the reasons and effects of such neglect first the optimal level of maintenance is shown to depend on the size of new investments as a share of existing public infrastructure and on the productivity of infrastructure second the model is parameterized and solved numerically for a sample of latin american countries quantitative results show that reallocating funds from new infrastructure to maintenance can have positive effects on these countries gdp

gaps and triangles we derive principles of optimal short run monetary policy in a real business cycles model with money and prices set in advance the optimal allocation is achieved under the friedman rule however given that policy the allocation is indeterminate we move away from the friedman rule take the interest rate path as exogenous and characterize the optimal money supply policy we identify the conditions under which it is optimal to replicate the allocation under exible prices in general sticky prices provide the planner with tools to improve upon a distorted exible prices allocation

new evidence on the structure of production real and austrian business cycle theory and the financial instability hypothesis abstract this article develops the relationships among real business cycle rbc theory austrian business cycle abc theory and minsky s financial instability hypothesis fih in rbc models recessions are caused on the supply side by random technology shocks which are independent of monetary policy however in abc models credit expansion results in negative productivity shocks as the marginal return on investment is lowered and the production structure is extended by commitment to more capital intensive activities thus abc theory helps resolve several problems with rbc theory the fih describes a process of endogenous overleveraging which unsustainably overvalues assets and exposes the financial sector to greater risk this paper argues that the overleveraging described by the fih is compatible with the unsustainable expansion of production described in abc theory and further argues that credit expansion would both provide additional funds to finance overleveraging as well as encourage the process by making it cheaper with lower interest rates

fiscal activism and the zero nominal interest rate bound in an economy where the zero lower bound on nominal interest rates is an occasionally binding constraint and the government lacks a commitment technology it may be desirable for society to appoint a policymaker who cares less about government spending stabilization relative to inflation and output gap stabilization than the private sector does a policymaker of this type uses government spending more elastically to stabilize the economy at the zero lower bound the anticipation of aggressive fiscal expansions in future liquidity trap situations increases inflation expectations and lowers real interest rates thereby mitigating the decline in output and inflation

scale congestion and growth this paper explores the relationship between aggregate and relative congestion returns to scale and economic growth aggregate congestion reduces the effective productivity of capital relative congestion reduces the effective productivity of labour both forms of congestion adversely affect the equilibrium growth rate although their relative effects depend upon aggre gate returns to scale the two forms of congestion have contrasting effects on the transitional dynamics relative congestion retards the rate of adjustment aggregate congestion accelerates it the externalities generated by congestion and non optimal expenditure can be fully cor rected both during the transition and in steady state by a time invariant income tax the role of public expenditure as an instrument of economic growth has been a major policy issue as governments throughout the world design stimulus packages as in japan and face difficult choices to meet the emu criteria in europe empirical research investigating the impact of public investment on the productivity of private capital and output was stimulated by aschauer 1989a b who found the effects to be strongly positive the nature of public investment is however diverse in general public goods vary extensively in terms of the nature of their services spanning the range between the polar cases of pure private and pure public goods but the treatment of public expenditures in formal growth models is limited barro 1990 and futagami et al 1993 treat government expenditure as a pure pub lic good and in so doing they fail to take account of the congestion typically associated with public goods however as barro and sala i martin 1992 have argued almost all public services are characterized by some degree of congestion so that the pure public good should be viewed as only a bench mark these considerations suggest that congestion is an important consider ation in assessing the effect of public expenditures on economic growth attempts to analyse the effects of congestion on economic growth have been limited in various dimensions drawing on the public goods literature edwards 1990 proposes a number of specifications of congestion two notions particularly relevant in a growth context are relative congestion and aggregate absolute congestion the former specifies the level of services derived by an individual from the provision of a public good in terms of the usage of his individual capital stock relative to the aggregate capital stock aggregate congestion sometimes called crowding indicates how aggregate usage of the service alone influences the services received by an individual 2 existing applications of congestion to growth theory introduce it into ak models see barro and sala i martin 1992 1995 glomm and ravikumar 1994 1997 and turnovsky 1996 1997 however the ak model features two limitations that restrict its flexibility to examine the relationship between congestion and growth first as solow 1994 pointed out sustained ongoing

government debt and optimal monetary and fiscal policy how do different levels of government debt affect the optimal conduct of monetary and fiscal policies and what do these optimal policies imply for the evolution of government debt over time to provide an answer this paper studies a standard monetary policy model with nominal rigidities and monopolistic competition and adds to it a fiscal authority that issues nominal non state contingent debt levies distortionary labor income taxes and determines the level of public goods provision higher government debt levels make it optimal to reduce public spending so as to dampen the adverse incentive effects of distortionary taxes but also strongly influence the optimal stabilization response following technology shocks in particular higher debt levels give rise to larger risks to the fiscal budget and to tax rates this makes it optimal to reduce government debt over time the optimal speed of debt reduction is missed when using first order approximations to optimal policies but is shown to be quantitatively significant in a second order approximation especially when technology movements are largely unpredictable in nature

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

the international entrepreneurial dynamics of accelerated internationalisation the initial stages of internationalisation prior to firms having established their definitive sources of advantage remain the relatively unexplored area of the international business ib literature at these early stages where firms are seeking to establish themselves and new multinational firms are appearing to exploit new opportunities created by globalisation the entrepreneurial aspects of internationalisation come to the fore in this paper we aim to delineate an emerging field of ib scholarship we use the appearance of international new ventures and the phenomenon of accelerated internationalisation that they feature to identify a set of issues that has slipped through the net of some of the existing ib frameworks we propose that the salient features of accelerated and early internationalisation by the newly internationalising firm are best captured in a framework that is found at the intersection of entrepreneurial and internationalisation perspectives which we propose be known as international entrepreneurial dynamics we discuss such a framework in terms of entry points and pathways mapped by firms as they probe the ib arena and the key factors that impinge on behaviour and strategic choices in line with recent developments in the entrepreneurship literature these are grouped into three milestones of entrepreneurial processes that extend across national boundaries 1 the discovery of new opportunities 2 the deployment of resources in the exploitation of these opportunities and 3 the engagement with competitors implications for mne and internationalisation theory are discussed

public investment in infrastructure in a simple growth model abstract in this paper we examine the implications for capital accumulation when infrastructure enters as an external input into private production functions in our model infrastructure is nonexclusive but may exhibit varying degrees of nonrivalry revenues from uniform taxes on capital and labor income are used to finance public investment in infrastructure we show that the optimal tax rate is independent of the degree of nonrivalry when production exhibits constant returns to augmentable factors the equilibrium displays constant growth for most parameters the growth rate depends on the population size under decreasing returns the optimal trajectory exhibits monotonic convergence to a steady state level

legitimating first organizing activities and the survival of new ventures abstract the process by which firm founders create new organizations is of considerable interest to evolutionary theorists and entrepreneurship researchers this article tracks the life histories of 223 swedish new ventures started between january and september 1998 by a random sample of firm founders we explore the effect of legitimating activities on the hazard of disbanding and the transition to other firm organizing activities during their first 30 months of life we find that undertaking activities to generate legitimacy reduces the hazard of venture disbanding and facilitates the transition to other organizing activities

austrian and industrial organization perspectives on firm level competitive activity and performance drawing on the austrian school of economics and the structure conduct performance s c p paradigm of industrial organization the authors present and test a dynamic model of competitive activity and performance they examine the model in two stages first they explore the influence of industry level and firm level cooperative mechanisms on firm level competitive activity second they examine the effect of firm and industry level competitive activity on firm performance the authors use the dynamic model of competitive activity to examine the complex linkages between the firm s environment its actions and its performance outcomes they report a longitudinal analysis of a sample of 1 903 competitive moves undertaken in the software industry hypothesis testing supports the relationships in the model argued from the austrian perspective but provides only partial support for those derived from the s c p paradigm firm level cooperative mechanisms are found to increase the firm s competitive activity a

institutional activism in the early american automobile industry abstract a common proposition is that new industries gain constitutive legitimacy through claim making by institutional activists yet neoinstitutional research seldom analyzes the effects of claim making on the formation of new organizations and how the effect of claim making is moderated by other sources of constitutive legitimacy advertising legal recognition and a policy regime favorable to business i explore the relationship between claim making by activists and new organization building in a study of the early american automobile industry when auto clubs organized reliability contests to validate the automobile the results show that the visibility of reliability contests within the focal state increased foundings of car firms in the state but that this effect diminished with advertising legal recognition of the car and the existence of a business friendly governor in the focal state taken together these results demonstrate that claim making is crucial in the early phase of gaining legitimacy for new industries

fiscal and monetary rules for a currency union abstract this paper addresses the optimal joint conduct of fiscal and monetary policy in a two country model of a currency union with staggered price setting and distortionary taxes a tractable linear quadratic approximation permits a representation of the optimal policy plan in terms of targeting rules in the optimal equilibrium monetary policy should achieve aggregate price stability following a flexible inflation targeting rule fiscal policy should stabilize idiosyncratic shocks allowing for permanent variations of government debt but should abstain from creating inflationary expectations at the union level simple policy rules can approximate the optimal commitment benchmark through a mix of strict inflation targeting and flexible budget rules conversely the welfare costs of balanced budget rules are at least one order of magnitude higher than conventional estimates of the costs of business cycle fluctuactions

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

debt inflation and central bank independence abstract increasing the independence of a central bank from political influence although ex ante socially beneficial and initially successful in reducing inflation would ultimately fail to lower inflation permanently the smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to decrease current distortions by increasing the deficit over time inflation would increase to accommodate a higher public debt by contrast imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions

mating competition and entrepreneurship abstract we used a natural experiment in taiwan to test whether mating competition is a major motive for entrepreneurship after being defeated in mainland china more than half million solders retreated to taiwan in 1949 the soldiers were not allowed to get married until the military marriage ban was lifted in 1959 the policy change created a severe marriage squeeze for local men triggering their animal spirits to engage in entrepreneurial activities empirical results show that local men exposed to high sex ratios as a result of the removal of the marriage ban were more likely to become entrepreneurs later on

the network of relationships between the economic environment and the entrepreneurial culture in small firms abstract in this article we maintain that the cultural evolution processes of small firms are strongly influenced by the type of relationships that they establish with the economic environment in the first part of the article the main points of the discussion are set forth here the theoretical debate is presented and the existing relations between the entrepreneurial culture and the interaction of firms with their economic environment is analyzed in the second part of the article the methodologies adopted for the statistical analysis are explained and the results of the empirical analysis are presented finally in the third part the implications for practitioners industrial policies and future directions in research are discussed the importance of openness to change in the entrepreneurial culture is a basic assumption in this study it is well known that in small and medium firms entrepreneurs often demonstrate a resistance to change that limits the firm s competitiveness in some observed territorial and industrial contexts this resistance to change is determined by a cultural entrepreneurial homogeneity this homogeneity is a result of the similarity of the social educational and entrepreneurial experiences of the subjects observed indeed the entrepreneurs studied had for generations received the same education lived in the same area and come from the same social setting this entrepreneurial culture is typified by distrust of innovation and discontinuity which leads these entrepreneurs to favor already proven solutions and initiate the behaviors of others rather than take innovative actions principal component analysis has been used to identify the influences that various factors within and external to the firm have in the forming of an entrepreneurial culture and thus on the openness of entrepreneurs and firms to learning in the sample a trade off emerged between tendencies to homologous behaviors and the spirit of initiative through cluster analysis we identified categories of entrepreneurs with a different propensity to innovation regarding established firm routines learning entrepreneurs belong mainly to industries that serve the final consumer while bounded entrepreneurs tend to specialize in commodities more often for export the implications of our results might interest new entrepreneurs who can include this element when analyzing the viability of new ventures small already operational firms can evaluate opportunities arising from export processes or might adjust their position on the production filiere to be closer to the final market this empirical analysis should be reapplied to firms in areas with different environmental characteristics or to production filieres where the relationship between customer and supplier is different as for example in high tech industries so as to verify whether the intensity of the relations with the market differs according to external factors or the technological intensity of the industries examined

the impact of technological turbulence on entrepreneurial behavior social norms and ethics three internet based cases we investigate the entrepreneurial opportunities and ethical dilemmas presented by technological turbulence more specifically we investigate the line between baumol s j polit econ 98 1990 893 productive e g innovation unproductive e g rent seeking and destructive e g criminal entrepreneurship through three examples of internet innovation spam destructive music file sharing unproductive and internet pharmacies potentially productive the emergence of accessible internet technologies under present norms has created the potential for all three entrepreneurial activities because of the propensity for self serving biases and for bending the rules the need for creativity in overcoming obstacles and overall liabilities of newness entrepreneurs are likely to challenge established industrial morals and laws unlike new entrants incumbents must abide by the currently accepted norms and thus suffer from liabilities of oldness the challenge for new entrants is to change sociopolitical legitimacy whereas incumbents need to defend the established norms we discuss competitive and other issues that result from technological turbulence and innovation

modern theories of entrepreneurial behavior a comparison and appraisal this paper compares and appraises three principal contemporary theories of entrepreneurial decision making neoclassical austrian and behavioral we employ theory appraisal criteria made available in fritz machlup s 1967 celebrated article on alternative theories of the firm the paper considers theories that treat sequences of behavior by which individual entrepreneurs reach decisions on two levels the discovery of profit opportunities and their exploitation we also consider how each theory characterizes the entrepreneur s decision making process by contrast with the posited behavior of other economic agents austrian theory is suited to explaining novel adventurous behavior at the discovery stage the algorithm for opportunity exploitation in both the neoclassical and austrian approaches is a single repertoire optimization rule neoclassical theory is situated in frictionless atomistic walrasian markets and emphasizes mathematical tractability austrian and behavioral theories conceive entrepreneurial acts taking place in market processes understood as complex institutional phenomena there are strong theoretical complementarities between austrian and behavioral approaches both approaches value descriptive accuracy though the behavioralists place more weight on operational tractability austrians and behavioralists share an interest in heuristics they emphasize the role of prior micro level knowledge at the discovery stage therefore more collaborative research in future between austrians and behavioralists should prove fruitful

learning about the unknown how fast do entrepreneurs adjust their beliefs this paper seeks to measure the extent to which entrepreneurs adjust their beliefs in the light of new information instead of relying on past experience to guide their decision making we build a model in which entrepreneurs continually receive valuable but noisy market signals about the true but unobserved productivity of their effort and use this information to update their expectations of unobserved productivity the model is estimated using a sample of over 700 self employed britons interviewed in 1999 and 2000 it is found that on average these individuals adjust their expectations of unobserved productivity in the light of new information by only 16 this suggests that while entrepreneurs do exploit new information they give much greater weight to their prior beliefs when forming their expectations also there are no significant differences in terms of expectation formation between males and females employers and non employers and experienced and less experienced entrepreneurs however younger entrepreneurs respond significantly more sensitively to new information than older entrepreneurs do with adjustment rates of 21 compared with 14 respectively we go on to discuss some policy implications of these findings and briefly discuss several features of entrepreneurship education programs that might help entrepreneurs improve this aspect of their business performance

growth and barriers to growth among nairobi s small and medium sized garment producers abstract few of nairobi s small and medium sized garment enterprises actually grow understanding why this should be so requires recognition both of their common problems and of the variations in their organization and market relations two factors appear critical for the growth of all of the producers demand for new clothing and the firm s initial capital other growth constraints differ according to the type of firm space constraints are highlighted as especially important for businesses presently operating in market stalls the design of policy and donor interventions needs to consider both the commonalities and the differences among firms

municipal capital maintenance and fiscal distress this paper formalizes and empirically tests the hypothesis that the deficient maintenance of public infrastructure is caused by fiscal distress the authors utilize a production decision framework in which public officials combine maintenance and new capital to produce a desired level of capital services the behavior implied in the fiscal distress hypothesis is treated as perverse deviations from the optimal production path the empirical findings from cross sectional expenditures data give support to the fiscal distress hypothesis copyright 1991 by mit press

international coordination of fiscal policy in limiting economies we examine the limiting behavior of cooperative and noncooperative fiscal policies as countries market power goes to zero we show that these policies converge if countries raise revenues through lump sum taxation however if there are unremovable domestic distortions such as distorting taxes there can be gains to coordination even when a single country s policy cannot affect world prices these results differ from the received wisdom in the optimal tariff literature the key distinction is that contrary to the tariff literature the spending decisions of governments are explicitly modeled

optimal fiscal and monetary policies in the face of rare disasters this paper studies optimal fiscal and monetary policies in an economy exposed to large adverse shocks rare disasters we contrast optimal policies under commitment and discretion and identify several striking differences between these institutional environments a government that can commit to its policy plans relies heavily on debt to smooth the adverse effects of large shocks over time lack of commitment seriously limits the government s ability to use debt as a shock absorber under discretion an increase in debt leads to an increase in inflation expectations and therefore higher nominal interest rate distortions hence the discretionary government keeps debt in close vicinity of its steady state level and the response of taxes inflation and interest rates to shocks is much more pronounced under discretion than under commitment this is particularly relevant for large shocks and when the initial stock of government debt is already high at the time the shock occurs we also argue that the adverse welfare effects of disasters are larger under discretion than under commitment but these welfare differentials can be significantly reduced by making the discretionary government inflation averse

central bank independence and the monetary instrument problem we study the monetary instrument problem in a dynamic noncooperative game between separate discretionary fiscal and monetary policy makers we show that monetary instruments are equivalent only if the policy makers objectives are perfectly aligned otherwise an instrument problem exists when the central bank is benevolent while the fiscal authority is short sighted relative to the private sector excessive public spending and debt emerge under a money growth policy but not under an interest rate policy despite this property the interest rate is not necessarily the optimal instrument

labor force participation and monetary policy in the wake of the great recession in this paper we provide compelling evidence that cyclical factors account for the bulk of the post 2007 decline in the u s labor force participation rate we then proceed to formulate a stylized new keynesian model in which labor force participation is essentially acyclical during normal times that is in response to small or transitory shocks but drops markedly in the wake of a large and persistent aggregate demand shock finally we show that these considerations can have potentially crucial implications for the design of monetary policy especially under circumstances in which adjustments to the short term interest rate are constrained by the zero lower bound

trend inflation and firms price setting rotemberg versus calvo we compare the calvo and rotemberg price setting mechanisms in a new keynesian model with trend inflation we show that the long run relationship between inflation and output is positive in rotemberg and negative in calvo the dynamics of the two models differ even to a first order approximation positive trend inflation enlarges the determinacy region in the rotemberg model whereas it shrinks it in the calvo model the responses of output and inflation to technology shocks are amplified by trend inflation in calvo whereas they are dampened in rotemberg the two models imply differing non linear adjustments after a disinflation

optimal structure of fiscal and monetary authorities why are monetary authorities not elected like fiscal authorities are advanced economies pair an elected fiscal authority with an independent monetary authority replicating the advanced economies structure with authorities microfounded by a political economy model shows that this structure is the solution to a constrained mechanism design problem that overcomes time inconsistency and results in the highest possible welfare goal and instrument independence singly and in combination are insufficient to minimize time inconsistency though their combination is necessary

israel m kirzner an outstanding austrian contributor to the economics of entrepreneurship israel m kirzner is the 2006 winner of the international award for entrepreneurship and small business research in this essay we present and evaluate his main contributions to the economics of entrepreneurship

public investment congestion and private capital accumulation this paper analyses the impact of public investment on the dynamics of private capital formation in an intertemporal optimising market clearing framework the key feature characterising the analysis is that the public good is treated as a durable capital good subject to congestion we show how in the presence of congestion the effect of government investment on private capital formation involves a tradeoff between the degree of substitution between private and public capital in production and the degree of congestion both lump sum and distortionary tax financing are considered with this tradeoff being tightened in the latter case

on the macroeconomic implications of maintenance in public capital abstract an infrastructure led growth model is constructed where the durability of public capital is endogenous and varies according to its usage and the level of maintenance expenditure policy changes in total expenditures and the maintenance share are shown to be important for the steady state and the dynamic behavior of the economy the optimal growth maximizing taxation burden which goes to both new investment and maintenance expenditure is in contrast to standard results from other growth models larger than the elasticity of infrastructure in the production function the optimal shares of maintenance expenditure and investment in new capital that ensure maximum utilization of public resources are calculated

experiment on entrepreneurial discovery an attempt to demonstrate the conjecture of hayek and kirzner friedrich hayek conjectured that the free enterprise system is most effective in making discoveries israel kirzner refines the conjecture as follows the availability of profit opportunities tends to evoke entrepreneurial discovery we hoped to demonstrate the conjecture in an outdoor experiment we asked subjects to transfer water from one bucket to another there were two methods of doing so an obvious method and a nonobvious and much superior method we varied the payment schedules to see if higher potential rewards would more readily evoke discovery of the superior method the hoped for demonstration was not achieved the investigation holds several lessons for those who would attempt to demonstrate the entrepreneurship conjecture investigators must make the opportunity discoverable but not obvious operationalize motivation not merely vary monetary rewards and separate entrepreneurial discovery from other types of discovery such as that had by deliberate problem solving

distortionary fiscal policy and monetary policy goals we reconsider the role of an inflation conservative central banker in a setting with distortionary taxation to do so we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments if the two authorities make policy decisions simultaneously inflation conservatism causes fiscal overspending but if fiscal policy is determined before monetary policy inflation conservatism imposes fiscal discipline these results clarify that in our setting the value of inflation conservatism depends crucially on the timing of policy decisions

an essay on the origins of entrepreneurial opportunity in this article we apply a process of logical inference to draw conclusions about the origins of entrepreneurial opportunity from existing conversations in the field of strategic management we equate the execution of a competitive strategy as described in the strategic management literature to the exploitation of an entrepreneurial opportunity as described in the entrepreneurship literature given this assumption we survey five extant theories of strategy in an attempt to categorize and describe the circumstances that define how and with what consequence entrepreneurial opportunity exploitation results in future opportunity given this review we characterize the outcomes of strategy execution as a function of the match between strategy and environment in an effort to extend and refine holcombe s holcombe randall 2003 review of austrian economics16 1 25 43 position that entrepreneurial opportunity is born of prior entrepreneurial action let your hook always be cast in the pool where you least expect it there will be a fish ovid a d 17

when should entrepreneurs expedite or delay opportunity exploitation abstract we theorize on the performance implications of the timing at which entrepreneurs stop exploring their business opportunities and start exploiting them using an optimal stopping approach we characterize the time when exploitation should begin based primarily on when an entrepreneur s ignorance has been sufficiently reduced through knowledge accumulation this ignorance threshold captures a tradeoff between the time needed to increase legitimacy and the necessity to act now to minimize competition changes in legitimacy and competition are based on how entrepreneurs manage their knowledge tacit versus explicit under differing degrees of novelty for the business opportunity these changes in turn impact the performance and timing of opportunity exploitation

dynamic monetary fiscal interactions and the role of monetary conservatism assuming that macroeconomic policies are directed by distinct monetary and fiscal policy makers who cannot commit to future actions we reassess the implications of monetary conservatism and fiscal impatience in a setting with nominal government debt for environments where a non negative steady state level of government debt assets emerges in the absence of conservatism and impatience monetary conservatism induces accumulation of a higher stock of liabilities assets and has adverse positive welfare implications this result obtains irrespectively of the degree of fiscal impatience and questions the unambiguous desirability of monetary conservatism traditionally found in the literature

the heterogeneity of animal spirits a first taxonomy of entrepreneurs with regard to investment expectations investment expectations are highly subjective and subjectivity is inherently diverse we propose an analytical taxonomy of entrepreneurs with regard to investment expectations of how diverse animal spirits are we draw on past research so as to outline the relevant independent classification variables motivations skills management styles and affective traits comprise our four groups of classification variables based on a field study using a sample of 289 entrepreneurs and performing two different cluster analyses we find 11 stable groups of entrepreneurs we portray them as ideal types a la weber there may be major and minor memberships our 11 groups are the neoclassical manager the builder the administrator the paternalistic manager the hero the mogul the prophet the craftsman the inventor the gambler and the explorer

hostile environmental jolts transaction set and new business abstract in this exploratory study we examine empirically the effects of environmental jolts on the evolution of the set of relationships that entrepreneurs have with their customers and suppliers which we call the transaction set we believe that understanding how turbulence in the environment affects the ability of entrepreneurs to hold on to their existing relationships or to add new relationships is fundamental to understanding the evolution and growth of an organization from a start up to a stable wealth creating enterprise in the long run using longitudinal data spanning 7 to 10 years from five start up firms we investigate three questions on the connection between environmental jolts and changes in the transaction set of the firm first do environmental jolts during the early life of the firm induce significant reductions in the set of relationships of a new small firm second are entrepreneurs able to add new relationships in greater numbers than the exit of old relationships following a jolt and third do start ups enjoy a honeymoon period when environmental jolts do not induce significant reductions in the set of relationships after a jolt our study yielded several findings that may be of interest to entrepreneurs academics and incubator managers first environmental jolts have a significant impact on the exits of relationships from the transaction set of a new small firm but not necessarily on the entry of new relationships into the set thus although liabilities of newness and small size seem to affect the ability of entrepreneurs to hold on to their existing relationships during environmental jolts these jolts do not seem to affect the entrepreneur s ability to add ties at least in the very early life of the firm second the level of reduction after environmental jolts seems to be less severe during the early life and greatest during the adolescent period further entries of new relationships decrease with each succeeding jolt one implication of our findings is that environmental selection pressures are more severe after an incubation period called the honeymoon period a second implication of our findings is the way in which liability of adolescence manifests itself the honeymoon does not provide incubation against exits of relationships rather the incubation manifests itself in the form of the willingness of new customers and suppliers to join the entrepreneur s transaction set even during a jolt however this goodwill shown by new customers and suppliers decreases with each succeeding jolt thus making the firm very vulnerable to failure during its adolescent phase of life we believe our study emphasizes the role that chance plays in the early survival and growth of firms firms lucky to avoid hostile jolts after their honeymoon period will be in a better position to grow rapidly other things being equal despite sound management and superior exercise of enterprise jolts appear in the life of firms in a stochastic often unpredictable fashion although it is not clear that firms who have superior enterprise ability or slack are more likely to succeed than those who don t what is clear is that the ability to survive and grow is seriously affected with each succeeding jolt whatever the ability if our findings and our inference from the findings are general they have an important public policy implication for new small companies conventional wisdom holds that given liabilities of newness and small size incubator environments are best provided to start up firms we would recommend a different strategy incubator environments are best provided not at the start up stage to new business but at the adolescent stage incubators should be provided to companies that show during the honeymoon phase that their ideas and products have merit and that they can attract customers and investors to their venture it is during the adolescent stage that firms are most vulnerable to environmental disturbances and where ability may not be a sufficiently good discriminator between survival and failure

the evolution and nature of young firm networks a longitundial perspective this paper describes the evolution of networks during the first three years after start up and puts forward explanations of the nature of networks of young firms after three years we extend current research on networks by explicitly including both temporal change and spatial variation in our analyses of the longitudinal dataset in this paper we define networks as the main business relationships with respect to sales supply outsourcing and cooperation the nature of these business relationships is specified by four main characteristics type number source and location the longitudinal network analysis is therefore at the micro level the individual young firm and the characteristics of its most important business contacts are central in contrast to the literature our analyses show that sales relationships become increasingly social in source during the first three years after start up we also find a persistent geographical concentration strategy in the main business relationships it seems that extra regional relationships are losing ground to intra regional relationships over time firms are narrowing their spatial scope in their first three years in addition we trace important effects of gender education innovative firm behaviour region and sector on the nature of young firm networks three years after start up

is there a fiscal free lunch in a liquidity trap this paper uses a dsge model to examine the eects of an expansion in government spending in a liquidity trap the spending multiplier can be much larger than in the normal situation if the liquidity trap is very persistent and scal stimulus can be rapidly implemented moreover the budgetary costs may be minimal as the large response of output boosts tax revenues allowing for something close to a scal free lunch however we caution that the multiplier may be much smaller under plausible implementation lags for many types of public spending and or if the liquidity trap lasts less than two years in addition because the marginal impact of scal expansion decreases in the scale of the outlay it is crucial to distinguish between average and marginal multipliers

public capital maintenance and congestion long run growth and fiscal policies abstract in this paper we study an endogenous growth model in which public maintenance expenditures affect the depreciation rate of public capital and the latter is subject to congestion we find that economies with low congestion in public infrastructure will require a threshold level of public capital maintenance for ongoing growth we also examine the fiscal implications of public capital maintenance policies and we find that the composition of public capital expenditures under congestion is a crucial determinant of optimal and growth maximizing fiscal policies the government can affect the return of public capital by re allocating public expenditures between new public investment and maintenance and hence avoid excessive taxation that is required under increasing congestion

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

the alert and creative entrepreneur a clarification israel m kirzner is the 2006 winner of the international award for entrepreneurship and small business research the fsf nutek award in this prize lecture he argues that a number of those who have commented on his work have misunderstood certain aspects of his theoretical system and as a result the common distinction in the literature between schumpeterian and kirznerian entrepreneurs is flawed he also argues that his understanding of the market process set in motion by entrepreneurial decisions provides a theoretical underpinning for public policy vis a vis entrepreneurship professor kirzner s main contributions to the economics of entrepreneurship were also presented and evaluated by douhan et al small business economics 29 1 2 213 223 2007

optimal fiscal and monetary policy under sticky prices this paper studies optimal fiscal and monetary policy under sticky product prices the theoretical framework is a stochastic production economy without capital the government finances an exogenous stream of purchases by levying distortionary income taxes printing money and issuing one period nominally risk free bonds the main findings of the paper are first for a miniscule degree of price stickiness i e many times below available empirical estimates the optimal volatility of inflation is near zero this result stands in stark contrast with the high volatility of inflation implied by the ramsey allocation when prices are flexible the finding is in line with a recent body of work on optimal monetary policy under nominal rigidities that ignores the role of optimal fiscal policy second even small deviations from full price flexibility induce near random walk behavior in government debt and tax rates third sluggish price adjustment raises the average nominal interest rate above the one called for by the friedman rule finally an interest rate feedback rule whereby the nominal interest rate depends on inflation and output fits well the data emanating from the ramsey economy however the fitted rule is not of the taylor type for the implied inflation coefficient is less than one and close to zero and the output coefficient is negative jel classification e52 e61 e63

the composition of public expenditure and economic growth abstract noting that the literature has focused on the link between the level of public expenditure and growth we derive conditions under which a change in the composition of expenditure leads to a higher steady state growth rate of the economy the conditions depend not just on the physical productivity of the different components of public expenditure but also on the initial shares using data from 43 developing countries over 20 years we show that an increase in the share of current expenditure has positive and statistically significant growth effects by contrast the relationship between the capital component of public expenditure and per capita growth is negative thus seemingly productive expenditures when used in excess could become unproductive these results imply that developing country governments have been misallocating public expenditures in favor of capital expenditures at the expense of current expenditures

the composition of government expenditure and its consequences for macroeconomic performance abstract this paper employs the intertemporal optimizing market clearing framework to compare the effects of government consumption expenditure and government infrastructure expenditure on macroeconomic adjustment and performance particular attention is focused on the time path of the capital stock and its adjustment to both permanent and temporary changes in government expenditure are considered we show how the effects of both forms of government expenditure on economic welfare can be broken down into 1 i a direct crowding out effect and 2 ii a second component which describes the intertemporal tradeoffs between the short run rate of capital accumulation and the resulting change in the capital stock

monetary conservatism and fiscal policy abstract does an inflation conservative central bank a la rogoff 1985 remain desirable in a setting with endogenous fiscal policy to provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility we find that lack of fiscal commitment gives rise to excessive public spending the optimal inflation rate internalizing this distortion is positive but lack of monetary commitment generates too much inflation a conservative monetary authority thus remains desirable when fiscal policy is determined before monetary policy each period the monetary authority should focus exclusively on stabilizing inflation monetary conservatism then eliminates the steady state biases associated with lack of monetary and fiscal commitment and leads to stabilization policy that is close to optimal

monetary and fiscal policy interaction the current consensus assignment in the light of recent developments in the last few years papers have begun to analyse optimal monetary and fiscal policy in models incorporating nominal rigidities where social welfare is derived from the utility of agents this article examines whether this analysis provides support for the consensus assignment where monetary policy controls demand and inflation and fiscal policy controls government debt we argue that the basic structure of new keynesian models implies that monetary policy dominates fiscal policy as a means of controlling inflation no similar dominance appears to operate for fiscal policy and debt if debt has to return to its initial level after shocks

the effects of discretionary fiscal policy on macroeconomic aggregates a reappraisal fiscal stimuli to recover a cascade of academic and layman articles debate the effectiveness of fiscal policy in stimulating the economy backed up by different economic models and empirical support this essay surveys the theoretical predictions and recent empirical vector autoregression var evidence on the short run effects of discretionary fiscal policy on macroeconomic aggregates

is your firm a creative destroyer competitive learning and knowledge flows in the technological strategies of firms abstract a firm s technology strategy can be described either as a war of position or a war of movement the first kind of strategy leads the firm to hoard its technological assets in an attempt to defy the equilibrating action of market forces neoclassical or n learning the second pushes for a selective diffusion of its technological assets that will move it beyond market equilibrium and towards new opportunities schumpeterian or s learning using boisot s 1986 culture space as an analytical tool the paper explores the difference between n and s learning and how they each affect a firm s technological prospects

new public investment and or public capital maintenance for growth the canadian experience i introduction in search of the determinants of long run growth a strand of the relevant literature has focused on the growth impact of public productive expenditures the theoretical work of barro 1990 barro and sala i martin 1992 and others and the empirical evidence by several studies surveyed by gemmel and kneller 2001 have stressed the role of government productive activities as key determinants of long run growth the impact of public expenditures typically takes the form of positive production externalities that enhance private sector productivity via private firms production function either as a flow government productive services or as a stock public or infrastructural capital 1 the adoption of this framework embeds two central assumptions on the nature of public capital expenditures first all expenditures related to the public capital accumulation process of the economy are oriented to the formation of new public capital through investment second public capital deterioration is considered as an exogenously given technical relationship hence this approach neglects a crucial choice concerning the implementation of public investment decisions namely the choice between investing in new public capital and extending the durability of the existing public capital stock the cost paid for the latter option is usually called maintenance expenditures for public capital and strictly speaking should be classified under the budgetary term public investment because it fulfills two basic criteria 1 it is financed by taxation or government borrowing and 2 it does not result in public consumption expenditures but instead increases the public capital stock available in the economy 2 despite the intuitive consensus on the crucial weight of maintenance expenditures in public capital and the trade off with expenditures in new public investment there have been few systematic attempts to investigate their macroeconomic impact an attempt to analyze this trade off has been recently made by rioja 2003 who sets up a growth model where domestic tax revenues finance maintenance expenditures for public capital whereas public infrastructure is financed solely by foreign donors the author shows that the optimal maintenance level as a share of output depends on various parameters and presents calibration results from latin american countries that confirm the importance of maintenance for the pattern of growth in these countries along this line kalaitzidakis and kalyvitis 2004 extend rioja s model by concentrating on the implications of maintenance expenditures for public capital formation on growth in their model both types of expenditures are financed by a tax on output by altering their allocation the government can use the share of maintenance as a policy instrument and raise the shadow value of private capital thus leading the economy to a higher growth rate an appealing implication is that the growth maximizing share of taxation is higher than the elasticity of public capital in the production function which reverses a standard argument put forward by among others barro 1990 glomm and ravikumar 1994 devarajan et al 1998 as the additional positive effect of maintenance expenditure on the accumulation of public capital raises the benefits of taxation compared to the standard models although theoretically sound these relationships do not translate easily into operational guidelines for policy makers on the growth effects of maintenance and new public capital expenditures 3 ideally one would like to test these implications in the context of a wide cross country data set consisting of data on each of the two components of public expenditures unfortunately published data on maintenance are very scarce involving only a handful of private activities due to inherent problems in the measurement of this type of expenditures mcgrattan and schmitz 1999 describe the difficulties in constructing aggregate measures of maintenance and repair the authors point out that for instance in the united states maintenance activities are largely carried out outside the market and thus recorded transactions are usually incomplete

the value of monetary policy commitment under imperfect fiscal credibility abstract a central finding of the previous monetary policy research is that commitment to a policy rule results in substantial welfare gains in this paper i reevaluate the value of monetary policy commitment in an environment where monetary and fiscal policies are conducted by separate branches of the government i find that welfare gains from monetary policy commitment can be small if the fiscal authority can exercise a certain degree of commitment on his own i also find that a moderate improvement in fiscal credibility can substantially reduce the welfare gains from full commitment in monetary policy under monetary leadership under fiscal leadership the degree of fiscal credibility does not affect the welfare gains from monetary commitment