regulatory reform in britain regulatory reform in britain john kay and john vickers major sectors of the british economy are currently undergoing far reaching regulatory reform deregulation removal of barriers to competition and the introduction of new methods of regulation are occurring notably in financial services some of the professions and in utility industries such as telecommunications gas and electricity this paper gives an economic assessment of these developments the authors examine the root causes of market failure that call for regulation externalities monopoly and information problems and the pros and cons of various regulatory responses a broad distinction is drawn between structural regulation the determination of which firms or types of firms can engage in which activities and conduct regulation the control of how firms behave in their chosen activities recent examples of deregulation plus re regulation in britain are seen in part as a shift from structural to conduct regulation the relative merits of the two modes of regulation are complex to assess but it is argued that some recent regulatory reforms are placing undue reliance on conduct regulation as well as assessing individual industries the authors draw general conclusions about the desirability of regulatory solutions that make full use of market forces

competition and social influence the diffusion of the sixth generation processor in the global computer industry1 when is a social actor most strongly influenced by its peers this article addresses this question by clarifying when computer firms were most strongly affected by the choices of their structurally equivalent rivals to adopt a well known technology intel s sixth generation processor the core hypothesis is that the effect of adoptions by structurally equivalent firms increases with the competitive pressure that a focal firm faces in its market position the results show that a chosen firm is most strongly influenced by comparable others when it faces scale based competition and is diversified the implications of this study are twofold a social actor s sensitivity to the conduct of others may depend not only on its place in a hierarchy but also on the nature of its ties to an external audience and a contingent theory of social influence may be necessary to characterize diffusion processes correctly particularly when external and time varying nonnetwork factors have significant effects

learning about a new technology pineapple in ghana this paper investigates the role of social learning in the diffusion of a new agri cultural technology in ghana we use unique data on farmers communication patterns to define each individual s information neighborhood conditional on many potentially confounding variables we find evidence that farmers adjust their inputs to align with those of their information neighbors who were surpris ingly successful in previous periods the relationship of these input adjustments to experience further indicates the presence of social learning in addition applying the same method to input choices for another crop of known technol ogy correctly indicates an absence of social learning effects jel d83 013 033 q16

sorting and agglomeration economies in french economics departments abstract are agglomeration and peer effects at stake in academic research to tackle this question we study how departments characteristics affect the quantity and quality of academics publications in economics in france controlling for individual time varying characteristics and individual fixed effects department characteristics have an explanatory power at least equal to a quarter of that of individual characteristics and possibly as high as theirs the quantity and quality of an academic s publications in a field increase with the presence of other academics specialised in that field and with the share of the department s publications output in that field in contrast department size proximity to other large departments homogeneity in terms of publication performance presence of colleagues with connections abroad and composition in terms of positions and age matter for some publication measures but only if not controlling for individual fixed effects

attack defence and contagion in networks sanjeev goyal acknowledges support from a keynes fellowship cambridge inet institute and european research area complexity net resilience and interaction of networks in ecology and economics adrien vigier acknowledges support from a gates cambridge fellowship as well as a core fellowship from universite catholique de louvain

investment decisions and time horizon risk perception and risk behavior in repeated gambles to investigate the effect of time horizon on investment behavior this paper reports the results of an experiment in which business graduate students provided certainty equivalents and judged various dimensions of the outcome distribution of simple gambles that were played either once or repeatedly for 5 or 50 times systematic mistakes in the ex ante estimations of the distributions of outcomes after independent repeated plays were observed despite correctly realizing that outcome standard deviation increases with the number of plays respondents showed evidence of samuelson s 1963 fallacy of large numbers perceived risk judgments showed only low correlations with standard deviation estimates but were instead related to the anticipated probability of a loss which was overestimated mean excess loss and the coefficient of variation implications for future research and practical implications for financial advisors are discussed

ideological segregation online and offline we use individual and aggregate data to ask how the internet is changing the ideological segregation of the american electorate focusing on online news consumption offline news consumption and face to face social interactions we define ideological segregation in each domain using standard indices from the literature on racial segregation we find that ideological segregation of online news consumption is low in absolute terms higher than the segregation of most offline news consumption and significan tly lower than the segregation of face to face interactions with neighbors co workers or family members we find no evidence that the internet is becoming more segregated over time

grabber holder dynamics and network effects in technology innovation abstract economists and marketing researchers have examined how network effects can have an impact on the adoption of technology and products and how an intrinsic inferior product or technology may dominate the market however their studies have not explained how a producer could create network effect for a new product and how after successfully creating the network effect for this product the producer could lose it in a short period of time while these studies provide insight into technology innovation after it happened they fail to shed light on understanding many of the surprises that we experience in the process the objective of this paper is to present a fundamental framework that helps us understand most of the surprising outcomes that we have seen in technology innovation processes especially the winners and losers in an innovation process the framework is built on a grabber holder dynamic model that captures how all the intelligent agents involved in an innovation shape the forces that either induce a strong network effect or destroy a network effect that is already in place the model can be used to explain many surprising events that have happened in technology innovation in this paper i apply the model to the personal computer innovation

diffusion of a new product under network effects the us dvd market we formulate a model that captures the inter dependence between hardware demand and software supply indirect network effect in the dvd industry the identification of the network effect comes from the difference in software availability across two different formats vhs and dvd we find that a 1 increase in the number of dvd titles raises the demand for dvd players by 0 87 simultaneously a 1 increase in video player ownership leads to a 0 14 increase in the variety of video titles our simulations show that hardware manufacturers might be able to internalize the network externality to increase total industry revenues

business to business bargaining in two sided markets abstract bargaining regularly takes place on the business to business side of two sided markets however little is known about the consequences of these negotiations in this paper we allow the platform or a policy maker to choose between a standard design offering posted prices to both sides or a design with bargaining offering a posted price to consumers and negotiating with at least some firms we find that the platform pursues negotiations when it has a strong bargaining position and does so by targeting firms with the largest network effects while this behavior may appear exploitive we show that profits and welfare often align across platform designs this alignment stems from how bargaining incentivizes the platform greater platform bargaining power allows the platform to extract more of the network surpluses since it can convert more of the firm surplus into profits and this incentivizes the platform to draw in greater participation generating greater welfare these results suggest that platform and policy maker preferences often align in this setting

is peer review in decline i introduction for the past half century or more peer reviewed journals have played a central role in the evaluation and dissemination of scientific research the internet has enhanced scientific communication in many ways and there is considerable excitement around new institutions for disseminating research 1 a more sobering thought however is that new technologies can also be disruptive this paper begins with some documentation of recent trends in economics publishing roughly the trends involve economists from top ranked departments publishing fewer papers in many top journals this could be a welcome change but is also potentially troublesome one way in which the internet could be disruptive is that it could allow high profile researchers to disseminate their work without subjecting it to peer review which in turn could lead to a broader unraveling of the peer review system the majority of the paper is then devoted to analyses of several additional data sources with the goal of understanding better what may be causing the observed trends the facts part of this paper documents two main facts 1 economists in top ranked departments now publish very few papers in top field journals there is a marked decline in such publications between the early 1990s and early 2000s 2 comparing the early 2000s with the early 1990s there is a decline in both the absolute number of papers and the share of papers in the top general interest journals written by harvard economics department faculty although the second fact just concerns one department i see it as potentially important to understanding what is happening because it comes at a time when harvard is widely regarded i believe correctly as having ascended to the top position in the profession the decline of peer review theory i allude to in the title is that the necessity of going through the peer review process has lessened for high status authors in the old days peer reviewed journals were by far the most effective means of reaching readers whereas with the growth of the internet high status authors can now post papers online and exploit their reputation to attract readers many alternate explanations are possible i focus on four theories the decline in peer review theory and three alternatives 1 the trends could be a consequence of top school authors being crowded out of the top journals by other researchers several such stories have an optimistic message for example there is more talent entering the profession old pro elite biases are being broken down more schools are encouraging faculty to do cutting edge research and the internet is enabling more cutting edge research by breaking down informational barriers that had hampered researchers outside the top schools 2 2 the trends could be a consequence of the growth of revisions at economics journals discussed in ellison 2002a 2002b in this more pessimistic theory highly productive researchers must abandon some projects and or seek out faster outlets to conserve the time now required to publish their most important works 3 the trends could simply reflect that field journals have declined in quality in some relative sense and become a less attractive place to publish this theory is meant to encompass also the rise of new journals which is not obviously desirable or undesirable the majority of this paper is devoted to examining various data sources that provide additional details about how economics publishing has changed over the past decade these are intended both to sharpen understanding of the facts to be explained and to provide tests of auxiliary predictions of the theories two main sources of information are used data on publications and data on citations the publication data include department level counts of publications in various additional journals an individual level dataset containing records of publications in a subset of journals for thousands of economists and a very small dataset containing complete data on a few authors publication records

discontinuous adoption paths with dynamic scale economies this paper examines the equilibrium adoption patch for two innovations when there are network externalities we show that the existence of significant increasing returns in system scale can give the result that one variant will drive out the other one and so emerges as the unique standard for the industry moreover if network externalities are sufficiently strong then the equilibrium adoption path is discontinuous that is it includes a catastrophe point

adoption and diffusion of an innovation of uncertain profitability the argument has frequently been made that the pattern of diffusion associated with most new innovations will typically have certain characteristics a diffusion curve for an innovation is usually defined as the proportion of its potential users who have already adopted as a function of time measured from the first adoption many empirical studies by both economists and other social scientists have shown that diffusion curves nearly always have two distinct characteristics i they are s shaped the proportion adopted is an increasing function of time which is initially convex but eventually becomes concave and ii they tend to be right hand skewed the inflection point occurs at a time corresponding to a proportion adopted which is less than one half so that the function is concave over the greatest amount of time in fact this skewing is occasionally severe enough to make the diffusion curve appear concave everywhere the focus of most empirical studies of innovation diffusion has centered on identification of either the major determinants of the speed of diffusion or the characteristics of firms which determine how long they delay adoption the seminal contributions are griliches 6 study of hybrid corn and mansfield s 121 study of 12 industrial innovations these studies and most of the similar ones following conclude that diffusion is faster for innovations with higher profitability and that large firms tend to be the earliest adopters some studies e g mansfield 121 herregat 71 have attempted to ascertain

the impact of default risk on the prices of options and other derivative securities abstract this paper presents a model for valuing derivative securities when there is default risk the holder of a security is assumed to recover a proportion of its no default value in the event of a default by the counterparty both the probability of default and the size of the proportional recovery are random the paper shows how data on bonds issued by the counterparty can be used to provide information about model parameters

competing technologies the learning curve and rational expectations abstract the problem of choice between several variants of a technology subject to dynamic learning economies is examined in a rational expectations model with overlapping adopters it is shown that even with rational expectations the long term market outcome depends sensitively on the pattern of early chance events and that only one variant of the technology will come to dominate the market in the long run this variant need not be the one which is socially optimal or most promising technically

the old boy and girl network social network formation on university campuses this paper documents the structure and composition of social networks on university campuses and investigates the processes that lead to their formation using administrative data and information from facebook com we document the factors that are the strongest predictors of whether two students are friends race is strongly related to social ties even after controlling for a variety of measures of socioeconomic background ability and college activities we develop a model of the formation of social networks that decomposes the formation of social links into effects based upon the exogenous school environment and effects of endogenous choice arising from preferences for certain characteristics in one s friends we use student level data from an actual social network to calibrate the model we simulate the social network under alternative university policies aimed at reducing social segmentation we find that changes in the school environment that affect the likelihood that two students interact have only a limited potential to reduce the racial segmentation of the social network

getting closer or drifting apart advances in communication and transportation technologies have the potential to bring people closer together and create a global village however they also allow heterogenous agents to segregate along special interests which gives rise to communities fragmented by type rather than geography we show that lower communication costs should always decrease separation between individual agents even as group based separation increases each measure of separation is pertinent for distinct types of social interaction a group based measure captures the diversity of group preferences that can have an impact on the provision of public goods an individual measure correlates with the speed of information transmission through the social network that afiects for example learning about job opportunities and new technologies we test the model by looking at coauthoring between academic economists before and during the rise of the internet in the 1990s

economics an emerging small world we study the evolution of social distance among economists over the period 1970 2000 while the number of economists has more than doubled the distance between them which was already small has declined significantly the key to understanding the short average distances is the observation that economics is spanned by a collection of interlinked stars a star is an economist who writes with many other economists most of whom have few coauthors and generally do not write with each other

threshold models of interpersonal effects in consumer demand abstract whether one buys may be determined in part by how many others have when the correlation is positive we refer to bandwagon effects and when negative reverse bandwagons we construct demand schedules in the presence of such effects and with simple assumptions about supply investigate the existence of and approach to equilibrium stable price quantity equilibria exist but for many plausible parameter values equilibria are asymptotically unstable and system trajectories consist of cycles that can move with slight parameter changes via successive bifurcations into what has been called chaotic dynamics essentially indistinguishable from random noise these conditions occur despite assumptions of erfect information profit maximizing firms and utility maximizing individuals

speeding up the internet regulation and investment in european fiber optic infrastructure in this paper we study how the coexistence of access regulations for legacy copper and fiber networks shapes the incentives to invest in network infrastructure to this end we develop a theoretical model explaining investment incentives by incumbent telecom operators and heterogeneous entrants and test its main predictions using panel data from 27 eu member states over the last decade our theoretical model extends the existing literature by among other things allowing for heterogeneous entrants in internet access markets as we consider both other telecom and cable tv operators as entrants in the empirical part we use a novel data set including information on physical fiber network investments legacy network access regulation and recently imposed fiber access regulations our main finding is that more stringent access regulations for both the legacy and the fiber networks harm investments by incumbent telecom operators but in line with our theoretical model do not affect cable tv operators

coordinating adoption decisions under externalities and incomplete information abstract a monopolist sells a good whose value depends on the number of buyers who adopt it as well as on their private types the seller coordinates the buyers adoption decisions based on their reported types and charges them the price based on the number of adoptions we study ex post implementable sales schemes that are collusion proof and show that under the revenue maximizing scheme more buyer types are willing to adopt when there are more adoptions and the number of adoptions is maximized subject to the participation constraints

rational incompatibility with international product standards abstract international product standardization enables traditional price based competition but the existence of redesign costs or network effects creates market frictions that diminish the incentive to standardize if there already exists a different technology in an established market this leads to multi attribute competition between products and will generally reduce trade flows not only do incumbent firms using a different technology have an incentive to deviate from an international standard but a host country government concerned for its consumers welfare has no incentive to enforce the international standard and may even value deviation from the international standard through technical barriers to trade

returns to scale generated from uncertainty and complementarity abstract a choice theoretic model of capital production which generates u shaped long run average cost curves is presented increasing returns to scale are not caused by indivisibilities and decreasing returns to scale by a fixed factor uncertainty and complementarity lead to increasing returns in durability which leads to the decline in long run average costs production generates an integrated capital system comprising capital components each component is complementarity with the others and uncertainty with respect to component durability exists diminishing returns occur because capital services must be extracted through time and the time cost of deferred consumption eventually dominates the increasing returns

the slowdown of the economics publishing process over the last three decades there has been a dramatic slowdown of the publication process at top economics journals a substantial part is due to journals requiring more extensive revisions various explanations are considered democratization of the review process increases in the complexity of papers growth of the profession and cost and benefit arguments changes in the profession are examined using time series data connections between these changes and the slowdown are examined using paper level data there is evidence for some explanations but most of the slowdown remains unexplained changes may reflect evolving social norms

the market value of rarity abstract most theories of demand assume that consumers value the characteristics of products but are unconcerned with how many other consumers also consume the product however several theories of demand argue that consumers can value the exclusivity of possessing a rare object we test this implication on a particular collectible rare coins our paper examines the case of coins of a given type and identical quality that have mintages in different quantities this allows us to exclude the common case in which rarity or price itself is an indicator of quality for our sample rarer coins command higher prices rarity in the form of original mintage more strongly influences the market price than does collectibility as represented by the rarest coins of each mint mark or year we also point out that here may be other goods such as automobiles for which rarity may influence market demand

local network externalities and market segmentation this paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction it departs from the standard katz shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents it shows that even if rival firms engage in bertrand competition this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits the analysis also shows that some graphs or network structures do not permit such segmentation while for others there are easy to interpret conditions under which market segmentation obtains in equilibrium c 2009 elsevier b v all rights reserved

alpha hunters and beta grazers the search for incremental returns alphas in current parlance has become the holy grail of active investment this article begins by drawing a distinction between two broad classes of alphas 1 allocation alphas that are broadly available on a non zero sum basis by moving the strategic portfolio toward a more balanced return risk structure and 2 truly active skill based return enhancements derived from opportunistic inefficiencies inefficiencies can be hard to discern and even harder to exploit which may help explain both why some investors are able to consistently produce positive alpha and also why they are so few in number

choosing peers homophily and polarization in groups this paper studies the formation of peer groups entailing the joint production of public goods in our model agents choose their peers and have to pay a connection cost for each member added to the group after groups are formed each agent selects a public project to make a costly contribution to and all members of the group experience the benefits of these contributions since agents differ in how much they value one project relative to the other the group s preferences affect the generated profile of public goods we characterize mutually optimal groups groups that are optimal for all their members when contribution costs are low relative to connection costs mutually optimal groups must be sufficiently homogeneous as contribution costs increase relative to connection costs agents desire more connections which in turn raises the risk of free riding extreme peers are then more appealing since they are more willing to contribute and polarization arises

the role of search in university productivity inside outside and interdisciplinary dimensions due to improving information technology the growing complexity of research problems and policies designed to foster interdisciplinary research the practice of science in the united states has recently undergone significant structural change using a sample of 110 top us universities observed during the late 20th century we find that knowledge flows both in total and in their major components are a significant and positive determinant of research output outside knowledge flows from other universities have increased at a faster rate than inside flows from the same university over time the importance of outside flows for research output has risen and it has done so at a faster rate than the importance of inside flows has decreased thus the overall contribution of knowledge flows has increased and has shifted towards outside flows turning to knowledge flows by field we find that interdisciplinary knowledge flows have increased only slightly relative to same field flows despite policy initiatives that favor interdisciplinary research moreover the importance of interdisciplinary flows for research output while positive and statistically highly significant has stayed about the same even as same field flows have become more important probably because of growth in cyber infrastructure although a final verdict is yet to be reached one interpretation is that interdisciplinary research is still in its early stages while interdisciplinary flows have begun to increase the resulting discoveries and their influence on subsequent research may still lie in the future copyright 2011 the author 2011 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

theorizing path dependence a review of positive feedback mechanisms in technology markets regional clusters and organizations the concept of path dependence has often been criticized as vague and only narrowly applicable although we can find some very refined definitions of the concept we also find a wide range of empirical phenomena being described as path dependent we argue that more detailed accounts of the positive feedback mechanisms that form paths can take path dependence beyond this state of being overdetermined but under specified reviewing three well described cases of path dependent dynamics in technology markets regional clustering and organizations we define a core set of positive feedback mechanisms that constitute path dependence at different analysis levels and clarify the relationship between positive feedback and increasing returns we show that path dependent processes that is processes driven by positive feedback that veer toward rigidity or lock in can be but do not have to be found under many labels including structural inertia coevolution or institutional persistence we conclude that a precise definition of path dependence does not need to be at odds with the concept s widespread use in understanding organizational and industrial development processes copyright 2013 the author 2012 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

the mismeasurement of risk investors typically measure risk as the probability of a given loss or the amount that can be lost with a given probability at the end of their investment horizons this view of risk considers only the final result but investors perceive or should perceive risk differently they are affected by exposure to loss throughout the investment period not just at its conclusion we introduce two new ways of measuring risk within horizon probability of loss and continuous value at risk that reveal that exposure to loss is substantially greater than investors normally assume

a positive theory of flexibility in accounting standards abstract we develop a positive theory of accounting standards when standards generate network externalities and differ in the amount of reporting discretion or flexibility they provide firms we evaluate expected value maximizing firms preferences between two standards regimes rigid and flexible as the number of firms subject to each standard varies as the organization of the securities market varies and as the mapping from the underlying economics of the firms transactions to the accounting reports produced under the two standards vary we also compare firms preferences between the two regimes to the preferences of profit maximizing traders in the firms securities

peer effects in science evidence from the dismissal of scientists in nazi germany this paper analyses peer effects among university scientists specifically it investigates whether the quality and the number of peers affect the productivity of researchers in physics chemistry and mathematics the usual endogeneity problems related to estimating peer effects are addressed by using the dismissal of scientists by the nazi government in 1933 as a source of exogenous variation in the peer group of scientists staying in germany to investigate localized peer effects i construct a new panel data set covering the universe of scientists at the german universities from 1925 to 1938 from historical sources i find no evidence for peer effects at the local level even very high quality scientists do not affect the productivity of their local peers

the economics of convention c onventions regulate much of economic and social life yet they have received surprisingly little attention from economists by a convention we mean a pattern of behavior that is customary expected and self enforcing everyone conforms everyone expects others to conform and everyone has good reason to conform because conforming is in each person s best interest when everyone else plans to conform lewis 1969 familiar examples include following rules of the road adhering to conventional codes of dress and using words with their conventional meanings conventions with direct economic implications include species of money and credit industrial and technological standards accounting rules and forms of economic contracts indeed it would scarcely be an exaggeration to say that almost all economic and social institutions are governed to some extent by convention the main feature of a convention is that out of a host of conceivable choices only one is actually used this fact also explains why conventions are needed they resolve problems of indeterminacy in interactions that have multiple equilibria indeed from a formal point of view we may define a convention as an equilibrium that everyone expects in interactions that have more than one equilibrium the economic significance of conventions is that they reduce transaction costs imagine the inconvenience if whenever two vehicles approached one another the important exceptions are sugden 1986 and ullman margalit 1977 the interested reader might also refer to the symposium on social norms that appeared in the fall 1989 issue of this journal with articles by sugden 1989 and elster 1989

adoption externalities as public goods abstract a public good problem arises naturally in situations characterized by positive externalities or negative externalities for positive externalities agents furnish a public good by taking an action similarly for negative externalities agents furnish a public good by not taking an action we examine these externalities in a binary choice problem i e adoption externalities in each case there is a potential role for government intervention even when equilibrium transfers are not allowed since one equilibrium pareto dominates all others we analyze the positive and normative features of equilibria in these models and we explore the possibility of useful government intervention