cost reduction competition and industry performance in many markets firms compete over time by expending resources with the purpose of reducing their costs sometimes the cost reducing investments operate directly on costs in many instances they take the form of developing new products that deliver what customers need more cheaply therefore product development can have the same ultimate effect as direct cost reduction in fact if one thinks of the product as the services it delivers to the customer in the way that lancaster pioneered then product development often is just cost reduction

competition cooperation and innovation organizational arrangements for regimes of rapid technological progress abstract discussions of the link between firm size and innovation are outmoded because the boundaries of the firm have become fuzzy in recent decades strategic alliances constellations of bilateral agreements among firms are increasingly necessary to support innovative activities such alliances can facilitate complex coordination beyond what the price system can accomplish while avoiding the dysfunctional properties sometimes associated with hierarchy antitrust law and competition policy need to recognize that these new organizational forms are often the functional antithesis of cartels though they may have certain structural similarities a more complete understanding of bilateral contracts and agreements ought to reveal when and how cooperation can support rather than impede innovation and competition

a theory of disagreement in repeated games with bargaining this paper proposes a new approach to equilibrium selection in repeated games with transfers supposing that in each period the players bargain over how to play although the bargaining phase is cheap talk following a generalized alternating offer protocol sharp predictions arise from three axioms two axioms allow the players to meaningfully discuss whether to deviate from their plan the third embodies a theory of disagreement that play under disagreement should not vary with the manner in which bargaining broke down equilibria that satisfy these axioms exist for all discount factors and are simple to construct all equilibria generate the same welfare optimal play under agreement generally requires suboptimal play under disagreement whether patient players attain efficiency depends on both the stage game and the bargaining protocol the theory extends naturally to games with imperfect public monitoring and heterogeneous discount factors and yields new insights into classic relational contracting questions

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

capture by threat we analyze a simple stochastic environment in which policy makers can be threatened by nasty interest groups in the absence of these groups the policy maker s desire for reelection guarantees that good policies are implemented for every realization of the shock when pressure groups can harass the policy maker good policies will be chosen for only a subset of states of nature hence honest and able leaders might implement bad policies and needed reforms could be delayed in order to make good policies more likely the public will want to increase the cost of exerting pressure for nasty groups and provide rents to those in power this last result can be used to explain the existence of political parties they play a role resembling that of the supervisor in the literature on collusion in hierarchical agency a rational public may also choose to ignore negative media reports on a politician s personal life and in general elect strong political leaders the prevalence of coercive methods of infl

pretia ex machina prices and process in long term contracts aimong the primary motives for writing contracts identified in both the law and economics literatures is the desire to protect against the hazards inherent to exchange where one or both parties have invested in reliance or relationship specific assets in support of the transaction because such investments have a higher value in their intended than in their next best use parties have an incentive to engage in haggling or other forms of opportunism in hopes of influencing the distribution of the resulting quasi rents contracts promote efficiency by securing the distribution of those rents ex ante thereby avoiding costly repetitive bargaining over the terms of trade and reducing the risk for each party of relying on the performance of the other in reality this description of the role and functioning of contracting is oversimplified as a number of legal and economic scholars have emphasized contracts are not the precise mechanically enforced documents often encountered in economic theory 2 indeed contracts are extremely

assets and actions firm specific factors in the internationalization of u s internet firms by providing a nearly instant connection among parties at opposite corners of the world and enabling a variety of commercial exchanges the internet emerged as the technology expected to create a truly global market space internet firms faced the challenge of capitalizing on this development in this paper we examine what firm specific factors are associated with the propensity of pure u s based internet firms to enhance their international presence on the internet by developing country specific websites despite the assertion that all internet firms are born global our findings show that the pursuit of internationalization by internet firms is related to the levels of their intangible assets and strategic activity two types of intangible assets reputation and website traffic are positively related to the degree of internationalization so are the levels of competitive and cooperative activity and the interaction effects between reputation and competitive and cooperative activity these findings suggest that ideas from both resource based theory and research on competitive dynamics can contribute to understanding the internationalization of internet firms

de facto political power and institutional persistence much of the empirical work and the conceptual discussion of the impact of institutions on economic development either implicitly or explicitly assumes that institutions persist although acemoglu et al 2001 provide evidence that constraints on the executive persist many aspects of institutions change frequently less developed countries cycle between democracy and dictatorship and often change their constitutions relatedly while the current economic problems in latin america are often traced back to colonial times stanley l engerman and kenneth l sokoloff 1997 acemoglu et al 2002 the specific institutions that once underpinned the colonial economy such as the encomienda the mita or slavery vanished long ago these observations suggest that we need to develop a framework in which changes in certain dimensions of institutions are consistent with overall institutional persistence in this paper we make an attempt to highlight some important mechanisms for understanding simultaneous change and persistence in institutions institutional persistence in this context refers to the persistence of a cluster of economic institutions such as the extent of enforcement of property rights for a broad cross section of society acemoglu et al 2001 such lack of property rights enforcement may be driven by quite different specific institutions e g risk of expropriation entry barriers or economic systems such as serfdom or slavery in turn these different specific economic institutions may exist under different political institutions including dictatorships absolutist monarchies oligarchies and corrupt or even populist democracies given this rich array of possibilities a useful framework must specify which aspects of institutions can change which others have a tendency to persist in equilibrium and how the persistence of certain types of institutions could have lasting effects on economic outcomes in this paper we provide a simple model of the coexistence of change and persistence in institutions first we describe some existing approaches to the persistence of social arrangements as well as the essence of the mechanism we propose next we illustrate the key issues using the experience of the southern united states and last we provide a simple model that formalizes the main mechanism in the paper we conclude by discussing a complementary mechanism to the one presented in this paper

incomplete contracts and strategic ambiguity why are observed contracts so often incomplete in the sense that they leave contracting parties obligations vague or unspecified traditional answers to this question invoke transaction costs or bounded rationality in contrast the authors argue that such incompleteness is often an essential feature of a well designed contract specifically once some aspects of performance are unverifiable it is often optimal to leave other verifiable aspects of performance unspecified the authors explore the conditions under which this occurs and investigate the structure of optimal contracts when these conditions are satisfied copyright 1998 by american economic association

inequality democracy and the protection of property rights motivated by the observed relevance of institutional quality such as strong property rights for economic performance this research considers the emergence of property rights protection as a political outcome it argues that the support for such protection is greater the more equal income distribution and the smaller political bias when these conditions initially hold the politically influential rich elite may prefer to relinquish its power through democratisation in order to commit future policy makers to the enforcement of property rights thus ensuring larger investment and faster growth along the transition path in a very unequal economy however such democratisation will not take place

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

relational contracts and the theory of the firm relational contracts informal agreements sustained by the value of future relationships are prevalent within and between firms we develop repeated game models showing why and how relational contracts within firms vertical integration differ from those between nonintegration we show that integration affects the parties temptations to renege on a given relational contract and hence affects the best relational contract the parties can sustain in this sense the integration decision can be an instrument in the service of the parties relationship our approach also has implications for joint ventures alliances and networks and for the role of management within and between firms

friends acquaintances or strangers partner selection in r d alliances like governance structure and alliance scope partner selection may serve to safeguard firms intellectual assets in r d alliances we categorize potential alliance partners into friends acquainta

unequal societies income distribution and the social contract this paper develops a theory of inequality and the social contract aiming to explain how countries with similar economic and political fundamentals can sustain such different systems of social insurance fiscal redistribution and education finance as those of the united states and western europe with imperfect credit and insurance markets some redistributive policies can improve ex ante welfare and this implies that their political support tends to decrease with inequality conversely with credit constraints lower redistribution translates into more persistent inequality hence the potential for multiple steady states with mutually reinforcing high inequality and low redistribution or vice versa

institutional traps and economic growth this article s point of departure is that low quality institutions concentration of political power and material wealth and underdevelopment are persistent over time its analytical model views an equal distribution of political power as a commitment device to enhance institutional quality thereby promoting growth the politically powerful coalition contemplates relinquishing of its power through democratization weighing this advantageous consequence against the limit on own appropriative ability that it entails the possibility of two developmental paths is exhibited with concentration of political and economic power low quality institutions and slow growth and a more equal distribution of political and economic resources high quality institutions and faster growth

clusters entrepreneurial ecosystem co creation and appropriability a conceptual framework extant literature on clusters underplays the role of entrepreneurs and entrepreneurial management in creating and co creating organizations markets and supporting ecosystems we employ transaction costs resource knowledge capabilities and power control based theories to provide a comparative static governance based perspective on clusters we embed this into a more general co evolutionary entrepreneurial theory of the emergence evolution and co evolution of markets ecosystems and clusters we suggest that clusters can involve advantages that help engender superior appropriation of co created value as compared to alternatives entrepreneurial managers faced with a degree of choice will help co create clusters and be part of them for as long as they can appropriate more value in this way than through alternatives

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

cooperation and political economic performance in affluent democratic capitalism research on comparative political economic performance has traditionally followed two separate tracks one concerned with collective economic gain growth and efficiency and the other focused on distribution and redistribution cooperative institutions offer a key to understanding cross national variation among the affluent capitalist democracies in both facets of political economic performance these institutions cluster along two dimensions neocorporatism and firm level cooperation pooled time series analysis for 18 nations over 1960 89 suggests that 1 neocorporatism is a major source of distributive redistributive policies and outcomes and of several sources of collective gain 2 firm level cooperation is a key contributor to economic growth

transaction costs and contractual incompleteness the case of electricite de france abstract this paper explores the incompleteness of inter firm contracts through the lens of recent developments in transaction cost economics we built a non truncated contract database representing all the relationships of electricite de france edf with its coal carriers over the period 1977 1997 we tested and corroborated most propositions derived from transaction cost theory relating contractual incompleteness to transaction characteristics even when we considered the complete set of the theory s propositions by endogeneizing the asset specificity at stake in transactions to our knowledge this kind of test has never been conducted before

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

das human kapital a theory of the demise of the class structure this paper suggests that the demise of the capitalists workers class structure was a socio economic transformation orchestrated by the capitalists in reaction to the increasing importance of human capital in sustaining their profit rates physical capital accumulation in the process of industrialization enhanced the importance of human capital in production and generated incentives for capitalists to support the provision of public education for the masses triggering the demise of the existing class structure the implications of the theory are consistent with the voting patterns on england s education reform of 1902

r d appropriability opportunity and market structure new evidence on some schumpeterian hypotheses one of the largest bodies of literature in the field of industrial organization is devoted to the interpretation and testing of several hypotheses advanced by joseph schumpeter 1950 concerning innovation and industrial market structure one set of hypotheses focuses on the role of firm size as a determinant of r d spending and the rate of technological advance another set focuses on the effect of market concentration on r d and technological advance in this paper we reexamine the latter set of hypotheses at the industry level using new data on r d appropriability and technological opportunity collected by levin et al 1984 in a survey of r d executives in 130 industries

historical legacies a model linking africa s past to its current underdevelopment abstract recent studies have found evidence linking africa s current under development to colonial rule and the slave trade given that these events ended long ago why do they continue to matter today i develop a model exhibiting path dependence which provides one explanation for why these past events may have lasting impacts the model has multiple equilibria one equilibrium with secure property rights and a high level of production and others with insecure property rights and low levels of production i show that external extraction when severe enough causes a society initially in the high production equilibrium to move to a low production equilibrium because of the stability of low production equilibria the society remains trapped in this suboptimal equilibrium even after the period of external extraction ends the model provides one explanation why africa s past events continue to matter today

institutions supporting technical advance in industry elsewhere 1982 economists beliefs that modern capitalism is a fine innovation generating machine have no intellectual grounding in contemporary neoclassical theory the twin theorems take technologies as given the apparent effectiveness of capitalism in this arena must reside in characteristics and mechanisms other than those featured in the microeconomic theory textbooks in our book we attempt to analyze these it also is true that the capitalist engine is a much more complicated one than many economists seem to think i presently am

instabilities of strategic alliances an internal tensions perspective the instabilities of strategic alliances have been examined in the literature through a number of theoretical approaches alliance instabilities refer to major changes or dissolutions of alliances that are unplanned from the perspective of one or more partners although the literature identifies certain characteristics of strategic alliances that may lead to their unplanned dissolution the extent of our understanding of this subject appears to be fragmented and incomplete in this article we propose a comprehensive framework for adequately understanding alliance instabilities based on the notion of internal tensions we suggest that strategic alliances are sites in which conflicting forces develop and which can be viewed as being constituted by three key pairs of competing forces namely cooperation versus competition rigidity versus flexibility and short term versus long term orientation this tensions framework helps us in explaining the intrinsic vulnerability of alliances in terms of a wide range of internal contradictions and enables us to examine in an integrated manner the incidence dynamics and eventual dissipation of the inherent instabilities we discuss the interrelationships among the different internal tensions and their impacts on different types of strategic alliances we also examine the termination of alliances through mergers acquisitions and dissolution finally we suggest ways to empirically test the various ideas and propositions developed here and indicate directions for further research

reappraising the eclectic paradigm in an age of alliance capitalism this article discusses the implications of the advent of alliance capitalism for our theorizing about the determinants of mne activity in particular it argues that due to the increasing porosity of the boundaries of firms countries and markets the eclectic or oli paradigm of international production needs to consider more explicitly the competitive advantages arising from the way firms organize their inter firm transactions the growing interdependencies of many intermediate product markets and the widening of the portfolio of the assets of districts regions and countries to embrace the external economies of interdependent activities

corruption and the costs of redistribution micro evidence from indonesia this paper examines the degree to which the corruption in developing countries may impair the ability of governments to redistribute wealth among their citizens specifically i examine a large antipoverty program in indonesia that distributed subsidized rice to poor households i estimate the extent of corruption in the program by comparing administrative data on the amount of rice distributed with survey data on the amount actually received by households the central estimates suggest that on average at least 18 of the rice appears to have disappeared ethnically heterogeneous and sparsely populated areas are more likely to be missing rice using conservative assumptions for the marginal cost of public funds i estimate that the welfare losses from this corruption may have been large enough to offset the potential welfare gains from the redistributive intent of the program these findings suggest that corruption may impose substantial limitations on developing countries redistributive efforts and may help explain the low level of transfer programs in developing countries d 2005 elsevier b v all rights reserved

dynamic stability and reform of political institutions abstract this paper examines endogenous institutional change in a class of dynamic political games the political aggregation rules used at date t 1 are instrumental choices under rules at date t effectively rules are players who can strategically delegate future policy making authority to different rules a political rule is stable if it selects itself a reform occurs when an alternative rule is selected the stability of a political rule is shown to depend on whether its choices are dynamically consistent for instance simple majority rules can be shown to be dynamically consistent in many common environments where wealth weighted voting rules are not the result extends to political rules that incorporate private activities such as extra legal protests threats or private investment the approach is one way of understanding various explanations of institutional change proposed in the literature a parametric model of public goods provision gives an illustration

relational contracts and the value of loyalty this paper examines how relational contracting afiects the pattern of trade across the economy we suppose a flrm principal repeatedly chooses among of a set of potential trading partners agents under the threat of holdup the possibility of ex post opportunism allows agents to collect rents which act like a flxed cost that the principal must pay when initiating a new relationship the principal responds by dividing agents into insiders with whom she has previously traded and outsiders with whom she has never traded if the principal is su ciently patient the proflt maximising contract then uses insiders e ciently while being biased against outsiders this optimal strategy can be implemented by a maintenance contract that is robust to asymmetric information

why reputation favors joint ventures over vertical and horizontal integration a simple model abstract this paper investigates the effect of reputation in a model where two parties make noncontractable contributions to an economic undertaking it is shown that the optimal allocation of ownership between the parties is more similar in a repeated than in a one shot version of the model this implies that unified ownership and reputation are substitutes low discount rates and repeated investment decisions thus favor subcontracting and joint venture arrangements of the type commonly observed in japanese industry while full integration is more likely to be optimal when reputational forces are weak

new horizons or a strategic mirage artist led distribution versus alliance strategy in the video game industry abstract in this paper we contribute to the debate between researchers who argue that the emergence of online distribution allows content producers in the creative industries to bypass powerful publishers and distributors and other researchers who argue that this strategy cannot succeed without the complementary assets that these intermediaries provide we use a case study of the dutch video game developer dvgd bringing to market an identical game using two different but comparable distribution channels as a quasi experiment in the first release dvgd used online distribution to reach consumers directly whereas in the second it used an alliance with an established video game publisher we find that while the alliance required dvgd to share with the publisher a substantial fraction of the value appropriated by the game the alliance strategy resulted in greater absolute financial performance and relative market performance compared to the self publishing strategy we conclude that the differences in performance can be traced back to specialized complementary assets required for successful commercialization

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

transnational firms and the changing organisation of innovative activities it is suggested that a transition is taking place towards new modes of organising transnational corporations innovative activities first different units of multinational firms including foreign based subsidiaries are increasingly involved in the generation use and transmission of knowledge secondly multinationals are developing external networks of relationships with local counterparts through which foreign affiliates gain access to external knowledge sources and application abilities as a result of this evolutionary process multinationals organisation is subject to both centripetal and centrifugal forces considerable efforts are then necessary to innovate coordination procedures and mechanisms in order to enhance the generation circulation and use of knowledge a number of empirical works are reviewed providing some evidence of the evolutionary process discussed in the paper 1 transnational companies as networks of innovators economists have long viewed innovation as being primarily generated by firms in their home countries classic contributions in the economics of multinational corporations have consolidated this view referring mainly to the us based multinationals vernon 1966 kindleberger 1969 and stopford and wells 1972 theorised a quasi colonial relationship between the parent company and foreign subsidiaries wherein the latter are in charge of replicating the former s activities abroad with strategic decisions including r d and innovation strategies being rigidly centralised particularly vernon emphasised that coordinating international innovative activities would be too costly owing to the difficulties of collecting and controlling relevant information across national borders host countries and foreign subsidiaries would then play a role almost exclusively in the adoption and diffusion of centrally created technology this view was supported mainly by us economists and based on us evidence from the early post world war ii period but it was very influential for the development of studies on the economics of transnational companies tncs and the internationalisation of

why hold ups occur the self enforcing range of contractual relationships one of my most enjoyable intellectual experiences was working with armen alchian on the klein crawford and alchian 1978 hold up paper in this paper i extend the basic framework presented in that paper pointing out what i now consider to be its shortcomings and providing insights into the nature of hold ups and the form of contracts chosen by transactors to avoid hold ups the major analytical extension entails combining hold up analysis with my work on private enforcement because private enforcement capital is limited and written contract terms are necessarily imperfect transactors must optimally combine court enforced written terms together with privately enforced unwritten terms to define what i call the self enforcing range of their contractual relationship hold ups occur when unanticipated events place the contractual relationship outside the self enforcing range this probabilistic framework where transactors enter contractual relationships knowing that a hold up may take place but believing that the expected gains from trade outweigh the expected rent dissipating costs associated with the hold up risk is shown to have important implications for understanding the structure of contracts adopted by transactors in the marketplace i why do hold ups occur i begin with a simple example that illustrates the basic economic forces involved in a hold up assume that a builder constructs a house on a piece of land the builder does not own but rather only leases short term after the initial land lease expires the landowner could hold up the builder by raising the land rent to reflect the costs of moving the house to another lot this example illustrates all the hold up factors emphasized in klein crawford and alchian a the builder has made an investment that is highly specific to a particular piece of land and b the landowner has taken advantage of the incompleteness of the contract that governs the relationship in particular the fact that the lease does not cover future years to c expropriate the quasi rents on the builder s specific investment the obvious question is why anything like this would ever occur that is why would someone be so naive as to build a house on land for which they had only a short term lease our primary goal in klein crawford and alchian was not to explain the existence of hold ups but rather the institutions adopted by transactors to avoid hold ups for example we would expect that builders anticipating a potential hold up problem would decide to purchase the land or at least to sign a long term ground lease before starting construction however we do present some examples in the paper of hold ups that actually occurred the implicit reason we give for the occurrence of these hold ups is transactor ignorance apparently transactors are not always smart enough to choose the contractual arrangement that would eliminate the hold up problem oliver williamson provides a similar but much more explicit answer to the question of why hold ups occur when defining opportunism he states by opportunism i mean self interest seeking with guile this includes but is scarcely limited to more blatant forms such as lying stealing and cheating opportunism more often involves subtle forms of deceit more generally opportunism refers to the incomplete or distorted disclosure of information especially to calculated efforts to mislead distort obfuscate or otherwise confuse 1 for example the hold up may have occurred in our illustrative house construction example because the landowner deceived the builder with a low up front land rental price and vague promises about the future relying on the ability of one transactor to take advantage of the naivete or ignorance of another transactor is a highly unsatisfactory way to explain the incidence of hold ups simple examples of deception such as a builder constructing a house on land that is only rented short term rarely if ever occur

relational contracts and the value of relationships this article studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known i consider a principal agent setting where the principal has persistent private information about her outside option i show that if the principal has the bargaining power she wants to understate her outside option to provide strong incentives and then renege on promised payments while if the uninformed agent has the bargaining power the principal wants to overstate her outside option to capture more surplus i characterize how information is revealed how the relationship evolves and how this depends on bargaining power jel c78 d82 d83 d86

endogenous verifiability and relational contracting for contracting parties it will often be uncertain whether a legal court is able to enforce the real intents of their contract the strict requirements of verifiability make it costly if not impos sible for parties to arrange their transactions and design their contract in a way that makes it completely protected by the court a way out is then to rely on self enforcing relational con tracts through repeated transactions the parties can make it costly for each other to breach the contract by letting breach ruin future trade but the self enforcing range of contracts is limited so the court s ability to enforce a contract is not without consequence for the contracting parties if possible the parties may thus have incentives to take costly actions that affect the ability of the court both ex ante preparations in terms of detailed contracting and ex post revelation of informa tion can increase the probability of fair court enforcement in this paper we focus on the former assuming that the parties are able to improve the verifiability of the contracted actions by care ful ex ante contract specifications we assume that careful contracting can improve the court s ability to verify whether an action conforms to the one described in the contract then we ask what happens to the self enforcing contract equilibrium if a party takes actions ex ante that affect the probability of verification in order to provide some answers we analyze a simple repeated principal agent game where the verifiability of the agent s actions is endogenously determined by the principal s investments in drafting an explicit contract pertaining to the quality of the agent s output the model makes it possible to identify some subtle effects of two key enforcement devices legal courts and repeated interaction note that by endogenizing verifiability we also endog enize the degree of contractual incompleteness and the equilibrium level of incompleteness will depend on the verification technology i e the resource costs that are necessary to achieve various verifiability levels this verification technology will be influenced in an essential way by the quality of courts in fact we can use the model to study relationships between two distinct aspects of courts namely their ability which influences the verification technology and their predictability which manifests itself in the equilibrium level of verifiability i e the probability with which the court in fact will verify the relevant action the repeated game approach formalizes an economic concept of trust and trustworthiness since a party honors trust if the present value of honoring exceeds the present value of abusing it the discount factor is then a proxy for the trust level in the relationship by studying the effect of variations in verification technology and the discount factor we can gain insight into the rela tionship between court ability explicit contracting trust and relational contracting below we summarize the results

the world distribution of income falling poverty and convergence period we estimate the world distribution of income by integrating individual income distributions for 138 countries between 1970 and 2000 country distributions are constructed by combining national accounts gdp per capita to anchor the mean with survey data to pin down the dispersion poverty rates and head counts are reported for four specific poverty lines rates in 2000 were between one third and one half of what they were in 1970 for all four lines there were between 250 and 500 million fewer poor in 2000 than in 1970 we estimate eight indexes of income inequality implied by our world distribution of income all of them show reductions in global inequality during the 1980s and 1990s

history lessons institutions factor endowments and paths of development in the new world the explanations offered for the contrasting records of long run growth and development among the societies of north and south america most often focus on institutions the traditional explanations for the sources of these differences in institutions typically highlight the significance of national heritage or religion we in contrast argue that a hemispheric perspective across the wide range of colonies established in the new world by the europeans suggests that although there were many influences factor endowments or initial conditions had profound and enduring effects on the long run paths of institutional and economic development followed by the respective economies

complexity context and governance in biotechnology alliances this study explores the effect of coordination needs on alliance governance we examine coordination needs that arise as a consequence of the characteristics and the context of the alliance we posit that alliance characteristics and contextual factors influence alliance form and equity investment levels we evaluate the effects of the complexity of technology transfer and strategic complexity of the alliance we also study contextual factors represented by the distance between the intellectual property protection regimes of the home countries of the participants the focal firm s prior presence in the alliance country and its primary expertise in the industry we offer contrasting predictions based on appropriation and coordination perspectives our results demonstrate support for a dominant coordination perspective with alliance characteristics and some contextual factors influencing alliance form appropriation concerns play a weaker role and receive less support

a resource based theory of the firm knowledge versus opportunism this paper develops a resource based knowledge based theory of the firm its thesis is that the organizational mode through which individuals cooperate affects the knowledge they apply to business activity we focus on the polar cases of organization within a firm as compared to market contracting there will be a difference in the knowledge that is brought to bear and hence in joint productivity under the two options thus as compared to opportunism based transaction cost theory we advance a separate yet complementary answer to the question why do firms exist our aim is to develop an empirically relevant and complementary theory of why firms are formed a theory based on irreducible knowledge differences between individuals rather than the threat of purposeful cheating or withholding of information we assume limited cognitive abilities on the part of individuals bounded rationality and assume that opportunistic behavior will not occur the latter allows us to determine whether resource based

imitation costs and patents an empirical study it has long been recognised that the costs of imitating new products have an important effect on the incentives for innovation in a market economy as arrow i962 and others have pointed out if firms can imitate an innovation at a cost that is substantially below the cost to the innovator of developing the innovation there may be little or no incentive for the innovator to carry out the innovation in their discussions of the innovation process economists frequently have called attention to the major role played by the costs of imitation but there has been little or no attempt to measure these costs to test various hypotheses concerning the factors influencing them or to estimate their effects in this paper we report some findings of what seems to be the first study of this topic in addition we present data regarding the effects of patents on imitation costs and on the rate of innovation

inequality does cause underdevelopment insights from a new instrument consistent with the provocative hypothesis of engerman and sokoloff 1997 2000 this paper confirms with cross country data that agricultural endowments predict inequality and inequality predicts development the use of agricultural endowments specifically the abundance of land suitable for growing wheat relative to that suitable for growing sugarcane as an instrument for inequality is this paper s approach to problems of measurement and endogeneity of inequality the paper finds inequality also affects other development outcomes institutions and schooling which the literature has emphasized as mechanisms by which higher inequality lowers per capita income it tests the inequality hypothesis for development institutional quality and schooling against other recent hypotheses in the literature while finding some evidence consistent with other development fundamentals the paper finds high inequality to independently be a large and statistically significant barrier to prosperity good quality institutions and high schooling

local capture evidence from a central government transfer program in uganda according to official statistics 20 percent of uganda s total public expenditure was spent on education in the mid 1990s most of it on primary education one of the large public programs was a capitation grant to cover schools nonwage expenditures using panel data from a unique survey of primary schools we assess the extent to which the grant actually reached the intended end user schools the survey data reveal that during 1991 1995 the schools on average received only 13 percent of the grants most schools received nothing the bulk of the school grant was captured by local officials and politicians the data also reveal considerable variation in grants received across schools suggesting that rather than being passive recipients of flows from the government schools use their bargaining power to secure greater shares of funding we find that schools in better off communities managed to claim a higher share of their entitlements as a result actual education spending in contrast to budget allocations is regressive similar surveys in other african countries confirm that uganda is not a special case

four formal izable theories of the firm in this essay i define and compare elemental versions of four theories of the firm these elemental theories are distilled from important contributions by hart holmstrom klein williamson and others although these contributions have been widely cited and much discussed i have found it difficult to understand the commonalities distinctions and potential combinations of these seemingly familiar contributions in this essay therefore i attempt to clarify these issues in three steps i begin with informal summaries of the theories then turn to simple but formal statements of each elemental theory and finally nest the four elemental theories in an integrative framework

interfirm cooperation in strategic relationships the role of formal contract in this paper we use a large database of more than 3 700 strategic relationships in force between french firms in 2003 to study the way they achieve cooperation we find that cooperation is enhanced by a partner s reputation and the perceived balance of the relationship our results also suggest that while formal contracts have a negative impact on ex post cooperation when relationships are simple contracts are an enhancing factor of cooperative behaviors as soon as the intrinsic hazards of the relationship require higher ex ante contractual safeguards to secure agreements as a result formal contracts can on the one hand have a pernicious effect on the willingness of firms to implement cooperative behaviors and on the other and under precise circumstances appear a prerequisite allowing the emergence of ex post interfirm cooperation

the injustice of inequality in many countries the operation of legal political and regulatory institutions is subverted by the wealthy and the politically powerful for their own benefit this subversion takes the form of corruption intimidation and other forms of influence we present a model of such institutional subversion focusing specifically on courts and of the effects of inequality in economic and political resources on the magnitude of subversion we then use the model to analyze the consequences of institutional subversion for the law and order environment in the country as well as for capital accumulation and growth we illustrate the model with historical evidence from gilded age united states and the transition economies of the 1990s we also present some cross country evidence consistent with the basic prediction of the model

who co operates for innovation and why an empirical analysis abstract in recent years there has been growing interest in co operative arrangements for innovation with some commentators arguing innovation is no longer the province of individual firms but depends increasingly on collective action this paper examines the response to the uk s version of the second european community innovation survey cis 2 to investigate the patterns of co operation between innovating firms and external partners the analysis shows the relationship between innovation and co operation is not straightforward from a subjective i e firm based perspective it is clear that most firms still develop their new products processes and services without forming formal co operative arrangements for innovation with other organisations however firms that engage in r d and that are attempting to introduce higher level innovations i e new to the market rather than new to the firm innovations are much more likely to engage in co operative arrangements for innovation consequently if an objective i e innovation based perspective is taken which weighs innovations by their significance then it is likely that a significant proportion of high level innovations are developed through co operative arrangements although unfortunately the cis 2 does not indicate the direct significance of these arrangements to the development of the innovations in summary the extent of co operative arrangements for innovation appears to depend on the type of firms being considered and on what is meant by innovation

a framework linking intangible resources and capabilities to sustainable competitive advantage this article is concerned with the role of intangible resources in business strategy in particular it is concerned with identifying the intangible sources of sustainable competitive advantage sustainable competitive advantage results from the possession of relevant capability differentials regulatory and positional capabilities are concerned with intangible assets functional and cultural capabilities are concerned with competencies a framework linking intangible resources to capabilities has been devised and is used as the basis of a new technique for identifying the relative contribution which the different intangible resources make to competitive advantage the results of the use of this technique in six case studies are reported

competition cooperation and the neighboring farmer effect abstract in this paper we propose a model that explains how cooperation can emerge spontaneously between firms in a highly competitive market environment the basic idea is that the more competitive is the market the less costly it is for firms to help each other like good neighbors cooperation takes the form of sharing technical know how which speeds up the adoption of new technologies normally developed elsewhere that spur industrial development the model comports with the development history of japan s first example of successful industrial development its cotton spinning industry whose conditions match those of firms in small open economies today

formal contracts in the presence of relational enforcement mechanisms evidence from technology development projects formal contracting addresses the moral hazard problems inherent in interfirm deals via explicit terms designed to achieve incentive alignment alternatively when firms expect to interact repeatedly relational mechanisms may achieve similar results without the associated costs however as we now know from a growing body of theoretical and empirical work the resulting intuition that relational mechanisms will be substituted for formal ones whenever possible does not generally hold the extent to which firms substitute relational mechanisms for formal ones in the presence of repeated interaction is an empirical question that forms the basis of this paper we study a sample of 52 joint technology development contracts in the telecommunications and microelectronics industries and devise a coding scheme to allow empirical comparison of contract terms counter to the above intuition but consistent with recent research we find that a firm s contracts are more detailed and more likely to include penalties when it engages in frequent deals whether with the same or different partners our results suggest complementarity between formal and relational contracts and have implications for optimal contracting particularly in high technology sectors

spatial proximity and firm survival in a declining industrial district the case of knitwear firms in baden wu rttemberg the literature on small firm networks in industrial districts postulates the importance of territorial proximity for business innovation and regional development but empirical research to test this proposition is sparse while there is some research on the extent of interfirm co operation little is known about the performance outcomes of co operation i develop competing hypotheses from institutional ecological and random action theories concerning the survival chances of firms located in geographic proximity and test them with data on the complete population of knitwear firms in baden wurttemberg germany for the period from 1960 to 1998 proportional hazard estimates show that location in clusters of firms in the same industry increased business failure rates and location in diversified clusters of firms operating in complementary industries reduced failure rates the empirical results are most consistent with the ecological model of localized competition in resource environments la documentation

inequality and institutions abstract this paper presents theory and evidence on the relationship between inequality and institutional quality we exhibit a model in which the two may dynamically reinforce each other and set to test this relationship with a broad array of institutional measures the double causality between institutional strength and a more equal distribution of income is empirically established using dynamic panel and linear feedback analysis

the international economics of intellectual property right protection a welfare theoretic trade policy analysis abstract this paper provides an analytical construct for examining the trade policy effects of greater intellectual property protection in technology importing countries it is shown that two types of conflict are likely to arise between net technology importers and exporters the first relates to the level of protection with importers preferring a low level and exporters a high one the second conflict hitherto unexplored relates to the manner of protection with importers likely to prefer discriminatory regimes favoring local r d creation whereas exporters would prefer nondiscriminatory protection in importing countries

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1

explaining international and intertemporal variations in income inequality this paper explores the propositions that income inequality is relatively stable within countries and that it varies significantly among countries a new and expanded data set provides broad support for both propositions drawing on a political economy and capital market imperfection arguments to explain the intertemporal and international variation in inequality the empirical analysis shows that the predicted variables associated with the first argument a measure of civil liberties and the initial level of secondary schooling and the second argument a measure of financial depth and the initial distribution of land are indeed important determinants of inequality this paper explores two propositions regarding income inequality they are first income inequality is relatively stable within countries and second it varies significantly across countries to illustrate note that the gini coefficient in india remained almost constant for forty years 1951 92 with mean 32 6 and standard deviation 2 0 2 in contrast the variation in gini coefficients across countries is large 61 9 in honduras in 1968 compared with 17 8 in bulgaria in 1976 if substantiated these propositions have potentially significant implications for poverty the significance of the first is obvious barring any fundamental socio political change poverty reduction will depend crucially on the rate of economic growth given this the significance of the second is that in inegalitarian economies the poor will enjoy a smaller share of any national increment in income than in more egalitarian ones drawing on a new and expanded data set on inequality deininger and squire 1996a the first of the paper s three sections conducts standard statistical tests of the two propositions the sample comprises 573 observations on the most common measure of inequality the gini coefficient for 49 developed and developing countries covering the period 1947 94 the results broadly confirm our two propositions specifically analysis of variance anova shows that about 90 of the total variance in the gini coefficients

technology creation in semi industrial economies abstract technological activities in the semi industrial economies of latin america leading to the adaptation of imported technologies as well as the development of new products and processes have been both an involuntary byproduct of manufacturing activities and the result of deliberate decisions to set up technological research facilities technological research reported by latin american firms is shown to be largely complementary to production and carried out to reap the extra benefits of protection external effects are thus disregarded since the benefits from industrial production suffice to induce the requisite adaptive research the paper suggests that the as yet not well understood interaction between industrial and technological development be studied by focusing on technology as information and engineers as its processors looking at the learning stages from using imports to the creation of new products and examining these processes in terms of a progression toward increasing technological complexity

protesting and justifying a latent class model for contingent valuation with attitudinal data this article develops a latent class model for estimating willingness to pay wtp for public goods using simultaneously contingent valuation cv and attitudinal data to identify individuals with similar characteristics such as wtp and protest attitudes we find evidence that the answer to the cv question influences the responses to the attitudinal questions in our case this influence reflects rational behavior budget constraint issues and justification biases related to protest reasons such as lack of trust in institutions or fairness issues with respect to the distribution of the burden of preservation the results from our empirical application confirm the importance of accounting for those biases

is free trade passe abstract if there were an economist s creed it would surely contain the affirmations i understand the principle of comparative advantage and i advocate free trade yet the case for free trade is currently more in doubt than at any time since the 1817 publication of ricardo s principles of political economy and this is due to changes that have recently taken place in the theory of international trade while new developments in international trade theory may not yet be familiar to the profession at large they have been substantial and radical in the last ten years the traditional constant returns perfect competition models of international trade have been supplemented and to some extent supplanted by a new breed of models that emphasizes increasing returns and imperfect competition these new models call into doubt the extent to which actual trade can be explained by comparative advantage they also open the possibility that government intervention in trade via import restrictions export subsidies