financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

when transparency improves must prices reflect fundamentals better no in the presence of speculative opportunities investors can learn about both asset fundamentals and the beliefs of other traders we show that this learning exhibits complementarity learning more along one dimension increases the value of learning about the other as a result regulatory changes may be counterproductive first increasing transparency i e making fundamental information cheaper to acquire can make prices less informative when investors respond by learning relatively more about others second public disclosures discourage private learning about fundamentals while encouraging information acquisition about others accordingly disclosing more fundamental information can decrease overall informational efficiency by decreasing price informativeness received april 20 2016 editorial decision september 30 2017 by editor itay goldstein

a note on competitive investment under uncertainty uncertainty over future output prices or input costs can affect investment by a riskneutral firm in two opposing ways first it can increase the value of the marginal unit of capital which leads to more investment this only requires that the stream of future profits generated by the marginal unit be a convex function of the stochastic variable by jensen s inequality the expected present value of that stream is increased this result was demonstrated by richard hartman 1972 and later extended by andrew abel 1983 and others in their models constant returns to scale and the substitutability of capital with other factors ensure that the marginal profitability of capital is convex in output price and input costs even with fixed proportions however this convexity can result from the ability of the firm to vary output so that the marginal unit of capital need not be utilized at times when the output price is low or input costs are high if investment is irreversible and can be postponed a second effect of uncertainty is to create an opportunity cost of investing now rather than waiting for new information to arrive before committing resources this increases the full cost of investing in a marginal unit of capital which reduces investment 2 hence the net effect of uncertainty on irreversible investment depends on the size of this opportunity cost relative to the increase in the value of the marginal unit of capital the sign of the net effect is significant because of its possible policy implications pindyck 1988 and giuseppe bertola 1989 developed models in which a firm faces a downward sloping demand curve and found the net effect to be negative ricardo caballero 1991 has recently studied investment by an individual firm facing a stochastically shifting demand curve he shows that as returns to scale become constant and the elasticity of demand faced by the firm rises this opportunity cost of investing now rather than waiting approaches zero thus in the limit of constant returns and an infinitely elastic demand curve an increase in uncertainty tends to raise rather than decrease current investment even if that investment is irreversible it is important to stress that caballero s limiting result treats the firm in isolation and describes the effect of a meanpreserving increase in price uncertainty and not an increase in industry wide demand uncertainty this note shows that in a competitive market the key interactions between irreversibility and uncertainty occur at the industry level and can only be understood by making price and industry output endogenous 3 doing so restores the positive opportunity cost associated with irreversible investment in addition caballero s result is based on a model with convex adjustment costs an innovative aspect of the model is that these costs can be asymmetric thereby allowing for partial or complete irreversibility complete irreversibility corresponds to a cost of massachusetts institute of technology cambridge ma 02139 this work was supported by the national science foundation under grant no ses 8618502 and by mit s center for energy policy research my thanks to julio rotemberg and especially ricardo caballero for very helpful comments and discussions 1then the marginal profit of capital at each time t in the future is max o pt ct where ct is variable cost thus a unit of capital represents a set of all options on future production which are worth more the greater the variance of pt or ct 2for a detailed discussion of this point and a survey of the recent literature on irreversibility and its implications for investment and market evolution see pindyck 1991 3studies that make price endogenous include steven lippman and richard rumelt 1985 avinash dixit 1989 1991 and john leahy 1990

measuring the returns of r d an empirical study of the german manufacturing sector over 45 years abstract motivated by recent statistics that show significant growth in labor productivity this paper seeks to analyze the long term relationship between domestic rd recent rates of return on r d are estimated to have reached an all time low spanning the last 45 years current yields of r d are only one third compared to the sixties in conclusion though the productivity slowdown of the seventies seems to have been overcome this is not attributed to r d investments

information acquisition dissemination and transparency of monetary policy this paper examines the role of transparency in a benevolent monetary author ity s policies each firm s payoff depends on unobservable macroeconomic conditions and firms may incur a cost to acquire private information about macroeconomic conditions the policy authority attempts to infer the underlying macroeconomic conditions from a noisy measure of aggregate actions and makes a public announcement to inform firms of this inference high quality announcements provide firms the incentive not to gather private information and base actions solely on information contained in policy announce ments however this makes the observed actions of firms less informative to the policy authority jel classification e52 e58

financial markets the real economy and self fulfilling uncertainties we develop a model of informational interdependence between financial markets and the real economy linking economic uncertainty to information production and aggregate economic activities in general equilibrium the mutual learning between financial markets and the real economy creates a strategic complementarity in their information production leading to self fulfilling surges in economic uncertainties in a dynamic setting our model characterizes self fulfilling uncertainty traps with two steady state equilibria and a two stage economic crisis in transitional dynamics

potential information and target variables for uk monetary policy the relationship between traditional monetary policy goal variables nominal gdp real gpd and the inflation rate and a number of financial market variables is investigated the question examined is which if any of these financial market variables monetary aggregates interest rates and interest rate spreads are potentially useful as either information variables or intermediate targets while the implications concerning the usefulness of the financial variables considered are pessimistic concerning nominal gdp more robust relationships are found for real gdp and inflation the latter finding is of interest given the current uk monetary policy strategy of inflation targeting our results are however more supportive of the usefulness of several financial variables as information variables than as intermediate targets

corporate governance and innovation a survey abstract the traditional economics of innovation inspired by schumpeter and more recent advances on his work seem unable to explain why firms with similar external conditions may show greatly different performance in innovation contrastingly the literature on corporate governance provides some useful insights for understanding corporate innovation activity to the extent that such literature examines the economic effects of different modes of coordination between firm members the process through which individuals integrate their human and physical resources within the firm is central to the dynamics of corporate innovation this paper provides the first survey of the literature on this issue we start by discussing how various theoretical approaches to the analysis of the firm deal with technological innovation we then describe three main channels corporate ownership corporate finance and labour through which a system of corporate governance shapes a firm s innovation activity finally we examine the relationship between country level institutional settings national patterns of corporate governance and the aggregate innovation activity of corporations we conclude by suggesting that future research should focus more deeply on the interrelation between the various dimensions of corporate governance and on their joint effect on firm innovation

lack of preparation for rare events abstract a new view of crises is proposed a rare event occurs consciously unprepared agents take bad actions and catastrophic consequences follow we model agents who prepare to act in different contingencies they can process only a finite amount of information and thus cannot prepare perfectly for all contingencies in equilibrium agents equate the probability weighted expected loss due to suboptimal action across contingencies implying that the expected loss in a rare event is orders of magnitude larger than in normal times limited liability causes even less preparation for rare events and creates inefficiencies

information acquisition in global games of regime change abstract we study costly information acquisition in global games of regime change that is coordination games where payoffs are discontinuous in the unobserved state and in the agents average action we show that only symmetric equilibria exist and provide sufficient conditions for uniqueness we then characterize the value of information in these games and link it to the underlying parameters of the model we investigate equilibrium efficiency complementarities in information choices and the trade offs between public and private information we show that information acquisition can be inefficient and that strategic complementarities in actions do not always translate into strategic complementarities in information acquisition finally we find that public and private information can be complements these results contrast findings in linear quadratic models where payoffs depend continuously on both the unobserved state and the agents average action

information use and acquisition in price setting oligopolies asymmetric price setting multi product suppliers have access to multiple sources of information about demand conditions where the publicity of each source corresponds to the cross industry correlation of signals received from it a signal s influence on suppliers prices is increasing in its publicity as well as in its precision the emphasis on relatively public information is stronger for smaller suppliers who control narrower product portfolios when information is endogenously acquired suppliers listen to only a subset of information sources this subset is smaller when products are less differentiated and when the industry is less concentrated smaller suppliers focus attention on fewer information sources the inefficiencies arising from information acquisition and use are identified the associated externalities depend upon the extent of product differentiation the concentration of the industry and the degree of decreasing returns to scale

knowledge and venture funding complementarities and financial contracts in this article i analyse venture capital finance using the tools provided by the literature on the economics of innovation in particular the notion of localised technological knowledge and the resource based theory of the firm to build a model of financial contracting this entails that instead of looking exclusively at financial indicators or monetary incentives i will deepen the knowledge connection between the venture capitalist and the financed firm as the benchmark to understand the potential of this source of finance consistent with evidence regarding venture funding the model portrays a separation between a financial and a non financial part of the venture investment which is reflected in a dichotomy among the investors in fact the model shows that the success of a venture program is strictly linked to the knowledge flow inspired and reinforced by the complementarities between the knowledge bases of entrepreneur and venture capitalist instead to a particular financing scheme as sustained by most of the literature the model can also suggest a new methodology to analyse other intermediaries always exploiting the central role of knowledge in designing financial contracts copyright 2007 oxford university press

learning from prices public communication and welfare we study the effect of releasing public information about productivity or monetary shocks using a micro founded macroeconomic model in which agents learn from the distribution of nominal prices while a public release has the direct beneficial effect of providing new information it also has the indirect adverse effect of reducing the informational efficiency of the price system we show that the negative indirect effect can dominate thus the public information release may increase uncertainty about the monetary shock and reduce welfare we find that the optimal communication policy is always to release either all or none of the information

knowing what others know coordination motives in information acquisition we explore how optimal information choices change the predictions of strategic models when a large number of agents play a game with strategic complementarity information choices exhibit complementarity as well if an agent wants to do what others do they want to know what others know this makes heterogeneous beliefs di cult to sustain and may generate multiple equilibria in models with substitutability agents prefer to difierentiate their information choices we use these theoretical results to examine the role of information choice in recent price setting models and to propose modeling techniques that ensure equilibrium uniqueness

one leader and multiple follower stackelberg games with private information this study analyzes one leader and multiple follower stackelberg games with demand uncertainty we demonstrate that the weight on public information regarding a follower s estimation of demand uncertainty determines the strategic relationship between the leader and each follower when the relationship is strategic complement the leader can exit from a market the threshold is determined by the intensity of cournot competition among the followers

optimal degree of public information dissemination financial markets and macroeconomic environments are often characterised by positive external ities in these environments transparency may reduce expected welfare public announcements serve as focal points for higher order beliefs and affect agentsbehaviour more than justified by their informational contents some scholars conclude that reducing public signalsprecision or entirely withholding information may improve welfare this article shows that public information should always be provided with maximum precision but under certain conditions not to all agents restricting the degree of publicity is a better suited instrument for preventing the negative welfare effects of public announcements than restrictions on their precision are there is a general presumption that higher central bank transparency in terms of information disclosure to a wider audience improves the effectiveness of monetary policy and is beneficial to markets as it reduces information asymmetries helps to assess risk better and arrive at more informed decisions thus enhancing market efficiency while practitioners in central banks and international institutions agree on the desirability of informative announcements and promote higher transparency on the ground that any information is valuable to markets recent academic literature distin guishes private and public information and argues that public announcements may destabilise markets and reduce efficiency by their effects on higher order beliefs if markets are characterised by positive externalities morris and shin 2002 henceforth m s have shown that noisy public announcements may be detrimental to welfare from an ex ante point of view they conclude that a commitment to withholding relevant information or deliberately reducing its precision may be welfare enhancing in this article we challenge this conclusion by distinguishing two components of transparency precision ofinformationanddegreeofpublicity the degreeof publicity is the proportion of agents who receive a signal using a stylised coordination game introduced by m s we show that information should always be provided to the market

learning over the business cycle policy implications abstract this paper studies the policy implications of the endogeneity of information about the state of the economy the business cycle can be made less noisy and more efficient by incentivizing firms to vary their pricing and production decisions more with their beliefs about the state of the economy this calls for countercyclical taxes complemented by a monetary policy that leans against the wind the optimal policies trade off allocative efficiency for informational efficiency

the social value of public information with convex costs of information acquisition in a beauty contest framework welfare can decrease with public information if the precision of private information is exogenous whereas welfare necessarily increases with public information if the precision is endogenous with linear costs of information acquisition the purpose of this paper is to reconcile these results by considering nonlinear costs of information acquisition the main result of this paper is a necessary and sufficient condition for welfare to increase with public information using it we show that costs of information acquisition are linear if and only if welfare necessarily increases with public information thus welfare can decrease with public information for any strictly convex costs this is because convex costs mitigate the so called crowding out effect of public information on private information thereby making the social value of public information with endogenous precision closer to that with exogenous precision

are micro and macro labor supply elasticities consistent a review of evidence on the intensive and extensive margins we evaluate whether state of the art macro models featuring indivisible labor are consistent with modern quasi experimental micro evidence by synthesizing evidence on both the intensive and extensive margins we find that micro estimates are consistent with macro estimates of the steady state hicksian elasticities relevant for cross country comparisons on both the extensive and intensive margins however micro estimates of intertemporal substitution frisch elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences the key puzzle to be resolved is why micro and macro estimates of the frisch extensive margin elasticity are so different

quantitative goals for monetary policy we study empirically the macroeconomic effects of an explicit de jure quantitative goal for monetary policy quantitative goals take three forms exchange rates money growth rates and inflation targets we analyze the effects on inflation of both having a quantitative target and of hitting a declared target our empirical work uses an annual data set covering 42 countries between 1960 and 2000 and takes account of other determinants of inflation such as fiscal policy the business cycle and openness to international trade and the endogeneity of the monetary policy regime we find that both having and hitting quantitative targets for monetary policy is systematically and robustly associated with lower inflation the exact form of the monetary target matters somewhat especially for the sustainability of the monetary regime but is less important than having some quantitative target successfully achieving a quantitative monetary goal is also associated with less volatile output

an alternative monetary policy target for most of the period since the mid 1970s the federal reserve has expressed its monetary policy intentions by announcing the target growth rates of three principal monetary aggregates the simple sum m1 m2 and m3 however the sweeping changes and the deregulation in the financial industry have greatly affected the relevance of these traditional monetary aggregates the unusual behaviour of the simple sum monetary aggregates has forced the federal reserve to stop setting target range for m1 the measuring of monetary aggregates has become a controversial question this paper constructs the new benchmark divisia monetary indexes which reflect moneyness more accurately than the old divisia indexes i demonstrate that the historical trends of the divisia monetary indexes are sensitive to the brenchmark rates chosen in constructing these indexes in addition i compare the forecasting performance of the new benchmark divisia monetary indexes with the simple sum and the old divisia monetary indexes in the

r d and internal finance a panel study of small firms in high tech industries since joseph schumpeter economists have argued that internal finance should be an important determinant of r d expenditures yet almost without exception previous empirical studies have not found evidence of such a relation using newly available data the authors investigate this puzzle with a panel of 179 small firms in high tech industries under each estimation strategy they employ the authors find an economically large and statistically significant relationship between r d investment and internal finance their results are consistent with the view that because of capital market imperfections the flow of internal finance is the principal determinant of the rate at which small high tech firms acquire technology through r d copyright 1994 by mit press

do financial constraints hold back innovation and growth evidence on the role of public policy abstract this paper provides evidence that capital market imperfections hold back innovation and growth and that public policy can complement capital markets we deliver the evidence by studying the effects of government funding on the behavior of smes in finland by adapting the methodology recently proposed by rajan and zingales rajan r g zingales l 1998 financial dependence and growth american economic review 88 pp 559 587 to firm level data we show that government funding disproportionately helps firms from industries that are dependent on external finance we demonstrate that the result is economically significant and robust to a variety of tests

real options delay vs pre emption do industrial characteristics matter this paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory using panel data from the confederation of british industry cbi industrial trends survey we report ols estimates of the impact of uncertainty on investment where the regressors are augmented by cross sectional averages of the dependent variable and of the individual specific regressors as recently suggested by pesaran pesaran m h 2006 estimation and inference in large heterogeneous panels with a multifactor error structure econometrica 74 967 1012 the cross industry pattern of results is checked for consistency with the pattern predicted by real options theory using a specially constructed data set of industrial characteristics we find that irreversibility is able to predict the pattern detected but only when combined with a measure of the information advantage of delay there is also evidence for expansion options effects industries with high r d and advertising intensities tend to have positive uncertainty effects

is the growth of small firms constrained by internal finance this paper examines the long standing theory that the growth of small firms is often constrained by the quantity of internal finance under plausible assumptions when financing constraints are binding an additional dollar of internal finance should generate slightly more than an additional dollar of growth in assets this quantitative prediction should not hold for the relatively small number of firms which access external equity we test these predictions with a panel of more than 1 600 small firms and find that the growth of most firms is constrained by internal finance our results have implications for several different research literatures including models of firm growth

the dynamic capabilities of firms an introduction an expanded paradigm is needed to explain how competitive advantage is gained and held firms resorting to resource bas ed strategy attempt to accumulate valuable technology assets and employ an aggressive intellectual property stance however winners in the global marketplace have been firms demonstrating timely responsiveness and rapid and flexible product innovation along with the management capability to effectively coordinate and redeploy internal and external competences this source of competitive advantage dynamic capabilities emphasizes two aspects first it refers to the shifting character of the environment second it emphasizes the key role of strategic management in appropriately adapting integrating and re configuring internal and external organizational skills resources and functional competences toward changing environment 3 only recently have researchers begun to focus on the specifics of developing firm specific capabilities and the manner in which competences are renewed to respond to shifts in the business environment the dynamic capabilities approach provides a coherent framework to integrate existing conceptual and empirical knowledge and facilitate prescription this paper argues that the competitive advanis tage of firms stems from dynamic capabilities rooted in high performance routines z operating inside the firm embedded in the firm s processes and conditioned by its history it offers dynamic capabilities as an emerging paradigm of the modern business j firm that draws on multiple disciplines and advances with the help of industry studies in the usa and elsewhere

optimal monetary policy with uncertain fundamentals and dispersed information this paper studies optimal monetary policy in a model where aggregate fluctuations are driven by the private sector s uncertainty about the economy s fundamentals information on aggregate productivity is dispersed across agents and there are two aggregate shocks a standard productivity shock and a noise shock affecting public beliefs about aggregate productivity neither the central bank nor individual agents can distinguish the two shocks when they are realized despite the lack of superior information monetary policy can affect the economy s relative response to the two shocks as time passes better information on past fundamentals becomes available the central bank can then adopt a backward looking policy rule based on more precise information about past shocks by announcing its response to future information the central bank can influence the expected real interest rate faced by forward looking consumers with different beliefs and thus affect the equilibrium allocation if the announced future response is sufficiently aggressive the central bank can completely eliminate the effect of noise shocks however this policy is typically suboptimal as it leads to an excessively compressed distribution of relative prices the optimal monetary policy balances the benefits of aggregate stabilization with the costs in terms of cross sectional efficiency copyright wiley blackwell

public information and uninformed trading implications for market liquidity and price efficiency abstract we develop a rational expectations equilibrium model in which noise trading comes from discretionary liquidity traders the equilibrium quantity of aggregate noise trading is endogenously determined by the population size of liquidity traders active in the financial market by improving market liquidity public information reduces the expected trading loss of liquidity traders and thus attracts more such traders to the market which negatively affects information aggregation analyzing an alternative setting that models noise trading as coming from hedgers yields similar insights in a setting with endogenous information public information can harm information aggregation both through crowding out private information and through attracting noise trading

quantitative goals for monetary policy a quantile regression approach a recent paper by fatas et al 2006 indicates that formal monetary policy targets exchange rate money supply or inflation targets palpably decrease inflation in a sample of 40 countries the authors employ various least squares estimations which pick up the conditional average effect however there is wide inflation variability in the authors sample thus formal targets could have very different effects in high and low inflation countries accordingly we utilize the technique of quantile regression a method frequently used in labour economics we find in a sample of low and moderate inflation countries that formal targets exert no significant impact on low inflation nations this result is important for debates over formal targets such as whether the united states should adopt an inflation target there are costs and benefits in having formal targets and finding that targets do not decrease inflation when it is already moderate is an important piece of information to consider

agency models in different stages of ceo tenure the effects of stock options and board independence on r d investment this study examines how r d investment is shaped by governance devices combining the two agency models of limited competence and managerial opportunism it suggests that governance devices exert differing effects in early vs later stages of ceo tenure early in ceo tenure r d investment is reduced by stock options and board independence whereas in later stages these effects reverse r d investment is enhanced by stock options and board independence an empirical test on a sample of u s companies provides support for the hypothesized effects for policy makers this study implies that r d investment can be enhanced by setting rules and standards of good governance that take into account ceo time in office and firm context

double overreaction in beauty contests with information acquisition theory and experiment central banks disclosures such as forward guidance have a weaker effect on the economy in reality than in theoretical models the present paper contributes to understanding how people pay attention and react to various sources of information in a beauty contest with information acquisition we show that strategic complementarities give rise to a double overreaction to public disclosures by increasing agents equilibrium attention which in turn increases the weight assigned to them in equilibrium action a laboratory experiment provides evidence that the effect of strategic complementarities on the realised attention and the realised action is qualitatively consistent with theoretical predictions though quantitatively weaker both the lack of attention to public disclosures and a limited level of reasoning by economic agents account for the weaker realised reaction this suggests that it is just as important for a central bank to control reaction to public disclosures by swaying information acquisition by recipients as it is by shaping information disclosures themselves

policy with dispersed information information regarding economic fundamentals is widely dispersed in society is only imperfectly aggregated through prices or other indicators of aggregate activity and cannot be centralized by the government or any other institution in this paper we seek to identify policies that can improve the decentralized use of such dispersed information without requiring the government to observe this information we show that this can be achieved by appropriately designing the contingency of taxation on ex post public information regarding the realized fundamentals and aggregate activity when information is common as in the ramsey literature or when agents have private information only about idiosyncratic shocks as in the mirrlees literature the contingency on fundamentals alone suffices for efficiency when instead agents have private information about aggregate shocks the contingency on aggregate activity is crucial an appropriate combination of the two contingencies permits the government to i dampen the impact of noise and hence reduce non fundamental volatility without also dampening the impact of fundamentals ii induce agents to internalize informational externalities and hence improve the speed of social learning iii restore a certain form of constrained efficiency in the decentralized use of information and iv guarantee that welfare increases with the provision of any additional information jel c72 d62 d82

inflation targeting and switch of fiscal regime in new zealand monetary policy cannot be adequately addressed without also specifying fiscal policy i interpret the economic reforms in new zealand in the 1980s using a simple model that includes reaction functions of both monetary and fiscal policy the interpretation is based on the wealth effects of the government debt the successful and sustainable shift in monetary policy regime in new zealand was supported by a compatible switch in fiscal policy

what do firms know what do they produce a new look at the relationship between patenting profiles and patterns of product diversification in this work we analyze the relationship between the patterns of firm diversification if any across product lines and across bodies of innovative knowledge proxied by the patent classes where the firm is present putting it more emphatically we investigate the relationship between what a firm does and what a firm knows using a newly developed dataset matching information on patents and products at the firm level we provide evidence concerning firms technological and product scope their relationships the size scaling and coherence properties of diversification itself our analysis shows that typically firms are much more diversified in terms of products than in terms of technologies with their main products more related to the exploitation of their innovative knowledge the scaling properties show that the number of products and technologies increases log linearly with firm size and the directions of diversification themselves display coherence between neighboring activities also at relatively high degrees of diversification these findings are well in tune with a capability based theory of the firm

what fraction of a capital investment is sunk costs to what extent are capital investments sunk costs this question is addressed by examining the salvage values of discarded metalworking machinery even though such assets are expected to be non specific many discarded assets are scrapped rather than sold on second hand markets econometric results suggest that firms can only expect to get back 20 50 percent of the initial price of a new machine once it is installed the results also indicate differences in value age profiles across firms but provide only weak support for the hypothesis that salvage values are particularly low during recessions

managerial turnover and the theory of short termism abstract this paper presents a novel theory of managerial short termism that is based on managerial turnover the key feature is that if managers rewards are based on current profitability and there is some probability of managerial turnover then rational own reward maximizing managers may choose projects that have intrinsically lower net present values but yield higher returns in the earlier part of their lives this is because managers recognize that the existence of turnover means that there is some probability they won t be around to enjoy the returns generated by long term projects

matriculation in u s economics ph d programs how many accepted americans do not enroll using a sample of 26 u s economics ph d programs in fall 2003 we estimate that only about 12 percent of the u s and canadian students accepted for doctoral study did not enroll in any u s economics ph d program in fall 2003 or fall 2004 it is not possible to increase the supply of new ph d economists substantially by closing the sale on accepted applicants additional qualified applicants are needed nonmatriculants are remarkably similar to enrollees in demographics prior education test scores and fields of special interest but express less interest in economic research and are less likely to have been offered financial aid an expected financial aid deficiency was also the most cited reason for deciding not to matriculate followed by how long it takes to earn an economics ph d and the expectation of higher lifetime earnings in a career other than economics most who decided against an economics ph d enrolled in an alternative graduate program this abstract was borrowed from another version of this item

firm knowledge and market value in biotechnology we examine the relationship between the characteristics of the firms knowledge base in terms of knowledge capital and knowledge integration and the stock market value of 84 firms active in biotechnology during the 1990s panel data regression models show that the degree of knowledge integration within firms is a significant explanatory variable of firms stock market value moreover knowledge integration becomes an increasingly important determinant of market value which illustrates the growing integration of biotechnology in several industrial applications however the role of knowledge is sector specific revealing differences in the extent to which biotechnology has become a key technology copyright 2006 oxford university press

exogenous information endogenous information and optimal monetary policy most of the analysis of optimal monetary policy is conducted with the calvo model this paper studies optimal monetary policy when the slow adjustment of the price level is due to imperfect information by decision makers in firms we consider two models a model with exogenous dispersed information and a rational inattention model in the model with exogenous dispersed information complete stabilization of the price level is optimal after aggregate productivity shocks but not after markup shocks by contrast in the rational inattention model complete stabilization of the price level is optimal both after aggregate productivity shocks and after markup shocks moreover in the model with exogenous dispersed information there is no value from commitment to a future monetary policy by contrast in the rational inattention model there is value from commitment to a future monetary policy because then the private sector can trust the central bank that not paying attention to certain variables is optimal

short sale constraints information acquisition and asset prices abstract during financial crises financial market regulators often restrict short selling to support prices and curb volatility however evidence suggests that short selling bans during the turmoil in financial markets in 2007 2009 failed to achieve regulators goals we analyze a model of costly private information acquisition and asset pricing under short sale constraints to examine a possible cause of this failure we show that the constraints increase return volatility by adversely affecting the production of private information when investors are highly risk averse or are holding highly correlated risky assets the distortion in private information production arising from imposing short sale constraints leads to undervaluation implying that imposing short selling bans during economic crises not only fails to curb volatility but also may fail to support prices

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

information choice and amplification of financial crises we propose an amplification mechanism of financial crises based on the information choices of investors information acquisition makes investors more likely to act against their prior deteriorating public news under an initially strong weak prior increases reduces the value of private information and induces more less information acquisition deteriorating public news increases the probability of a crisis since the initially strong weak prior induces no attacks attacks this effect is amplified with endogenous information choices to enhance financial stability a policy maker affects information acquisition via taxes and subsidies we derive and discuss testable implications for the magnitude of amplification

optimal monetary policy with imperfect common knowledge we study optimal nominal demand policy in a flexible price economy with monopolistic competition where firms have imperfect common knowledge about the shocks hitting the economy information imperfections emerge endogenously because firms are assumed to have finite shannon capacity to process information we then ask how policy that minimizes a quadratic objective in output and prices depends on firms processing capacity when price setting decisions of firms are strategic complements we find that policy should nominally accommodate white noise mark up shocks for a large range of capacity values this fi nding is robust to the policy maker observing shocks imperfectly or being uncertain about firms processing capacity when mark up shocks are persistent accommodation may even have to increase in the medium term but has to decrease in the long run thereby generating a hump shaped price response and a slow reduction in output instead when prices are strategic substitutes policy tends to react with nominal demand contractions to mark up shocks in addition there might exist discontinuities between common knowledge equilibria and equilibria with small amounts of imperfect common knowledge

endogenous public information and welfare in market games this paper performs a welfare analysis of markets with private information in which agents can condition on noisy prices in the rational expectations tradition pricecontingent strategies introduce two externalities in the use of private information a payoff pecuniary externality related to aggregate volatility and a learning externality the impact of the first depends on whether competition is of the strategic substitutes or complements variety and the second induces agents to put too little weight on private information we find that with strategic substitutes and when the learning externality is not very strong agents put too much weight on private information and prices are too informative this will happen in the normal case where the allocational role of price prevails over its informational role under strategic complementarity there is always under reliance on private information the welfare loss at the market solution may be increasing in the precision of private information the analysis provides insights into optimal business cycle policy and a rationale for a tobin like tax for speculators in financial markets

controlling inflation in euroland the experience with the two pillar strategy of the european central bank ecb suggests that at some point in the future the ecb may have to commit to one of the more traditional policy strategies a direct inflation target or an intermediate monetary target this study offers some information on the scale of control and indicator problems associated with both strategies we estimate the links between monetary policy actions and inflation in dynamic linear models with the kalman filter using european m3 that the ecb has published it is found that the overall control problems involved in targeting money are larger than for direct inflation targets

research and development cash flow agency and governance uk large companies this paper investigates the determinants of r d expenditure using a sample of uk listed companies with the highest spend from 2000 to 2005 we investigate the effect of corporate governance and ownership on r d using panel data the results provide some evidence that more governance tends to depress r d activity a finding that is robust to whether a composite or disaggregated index of governance is used one innovation of the paper is that we treat agency and finance effects interactively the ownership stake of the ceo appears to be supportive for r d

central bank communication design in a lucas phelps economy abstract in a lucas phelps island economy an island has access to many informative signals about demand conditions each signal incorporates both public and private information the correlation of a signal s realizations across the economy determines its publicity if information sources differ in their publicity then price formation and expectations formation processes separate causing output gaps to open an output stabilizing central bank prefers averagely public information and sometimes limits the clarity of its policy announcements to achieve this the bank s incentive to engage privately in costly information acquisition and transmission is strongest not for the most influential signals but instead for those which drive the largest wedge between prices and expectations signals that are far from averagely public

optimal monetary policy and the role of hybrid inflation price level targets this study investigates the role of hybrid inflation price level targets as a solution to the well known stabilization bias problem that arises under discretionary policies the analysis shows that social welfare will be improved by employing a weighted average of inflation and price level as one of the central bank s target variables in addition to the output gap growth target the reason is that imposing the optimal hybrid target will reduce inflation variability in a highly efficient way in particular the optimal hybrid regime outperforms other previously suggested regimes when the degree of inflation persistence is moderate

information acquisition and welfare we study information acquisition in a flexible framework with strategic complementarity or substitutability in actions and a rich set of externalities that are responsible for possible wedges between the equilibrium and the efficient acquisition of information first we relate the in efficiency in the acquisition of information to the in efficiency in the use of information and explain why efficiency in the use is no guarantee of efficiency in the acquisition next we show how the acquisition of private information affects the social value of public information i e the comparative statics of equilibrium welfare with respect to the quality of public information finally we illustrate the implications of the results in a monetary economy with price rigidities and dispersed information about productivity shocks

modelling the innovation value chain innovation events the introduction of new products or processes represent the end of a process of knowledge sourcing and transformation they also represent the beginning of a process of exploitation which may result in an improvement in the performance of the innovating business this recursive process of knowledge sourcing transformation and exploitation comprises the innovation value chain modelling the innovation value chain for a large group of manufacturing firms in ireland and northern ireland highlights the drivers of innovation productivity and firm growth in terms of knowledge sourcing we find strong complementarity between horizontal forwards backwards public and internal knowledge sourcing activities each of these forms of knowledge sourcing also makes a positive contribution to innovation in both products and processes although public knowledge sources have only an indirect effect on innovation outputs in the exploitation phase innovation in both products and processes contribute positively tocompany growth with product innovation having a short term disruption effect on labour productivity modelling the complete innovation value chain highlights the structure and complexity of the process of translating knowledge into business value and emphasises the role of skills capital investment and firms other resources in the value creation process

financing and advising optimal financial contracts with venture capitalists this paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project without moral hazard it is optimal that both exert effort with moral hazard if the entrepreneur s effort is more efficient less costly than the advisor s effort the latter is not hired if she does not provide funds outside financing arises endogenously this explains why investors like venture capitalists are value enhancing the level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives

price dispersion private uncertainty and endogenous nominal rigidities this article shows that when agents learn from prices large private uncertainty may result from a small amount of heterogeneity as in a phelps lucas island model final producers look at the prices of their local inputs to infer aggregate conditions however market linkages between islands make the informativeness of local prices endogenous to general equilibrium relations in this context i show that a vanishingly small heterogeneity in local conditions is enough to generate an equilibrium in which prices are rigid to aggregate shocks and transmit only partial information i use this insight as a microfoundation for price rigidity in an otherwise frictionless monetary model and show that even a tiny amount of dispersion in fundamentals can lead to large non neutrality of money

moving closer to the action examining compensation design effects on firm risk we examine the influence of ceo equity based compensation on strategic risk taking by the firm building off the behavioral agency model agency theory and prospect theory we develop arguments about when equity based compensation elements will increase or decrease executive risk propensity and in turn strategic risk taking incorporating a behavioral perspective into our models of incentive alignment provides us with new and potentially more accurate predictions about how individual elements of ceo pay will influence risk selection as well as how equity compensation interacts with cash compensation and with other factors to influence risk preferences in general this study provides evidence that ceo equity based compensation significantly influences strategic risk but that this influence is more nuanced and complex than conventional treatments of executive compensation assume in particular we find that different forms of equity based pay exhibit dissimilar influences on strategic risk and that their influence changes as their value and vesting status change second we find that cash based forms of pay moderate the incentive properties of equity based pay indicating that cash based pay may affect how executives perceive risks associated with equity pay finally we find that stock price volatility and board actions each also moderate the incentive effects of equity based pay in sum our results argue for increased recognition of a behavioral perspective on executive compensation and greater precision in how we measure and model the incentive alignment properties of ceo compensation

rare disasters asset prices and welfare costs a representative consumer model with epstein zin weil preferences and i i d shocks including rare disasters accords with observed equity premia and risk free rates if the coefficient of relative risk aversion equals 3 4 if the intertemporal elasticity of substitution exceeds one an increase in uncertainty lowers the price dividend ratio for equity and a rise in the expected growth rate raises this ratio calibrations indicate that society would willingly reduce gdp by around 20 percent each year to eliminate rare disasters the welfare cost from usual economic fluctuations is much smaller though still important corresponding to lowering gdp by about 1 5 percent each year

the u shaped investment curve theory and evidence we analyze how the availability of internal funds affects a firm s investment we show that under fairly standard assumptions the relation is u shaped investment increases monotonically with internal funds if they are large but decreases if they are very low we discuss the tradeoff that generates the u shape and argue that models predicting an always increasing relation are based on restrictive assumptions using a large data set we find strong empirical support for our predictions our results qualify conventional wisdom about the effects of financial constraints on investment behavior and help to explain seemingly conflicting findings in the empirical literature

cournot competition and the social value of information in a differentiated product cournot model each supplier receives informative signals about demand the cross industry correlations of the signals differ more public signals have higher correlation coefficients in equilibrium information is used inefficiently from the industry s perspective information is over used and too much emphasis is placed on relatively public signals from the consumer s perspective information is under used and too much emphasis is placed on relatively private signals welfare is enhanced by increasing the use of information as desired by consumers but re balancing that use away from public signals as desired by the industry if information is costly and endogenously acquired then suppliers acquire too much new information but they use it too little

r d and ceo departure date do financial incentives make ceos more opportunistic the purpose of this article is to examine whether research and development r d expenditure is biased downward because of self serving behavior of highly incentivized managers this offers an insight into the general relationship between incentives and opportunism using instrumental variables and panel data methods for a sample of high r d spenders in the uk we examine whether r d is reduced in cases of imminent departure of the ceo results show evidence for this but only for the sample above the median in intensity of stock and options in the compensation package this suggests that opportunism is enhanced by inappropriately strong incentives the main results are robust to the inclusion of a number of corporate governance variables jel classification g30 o30

information acquisition and welfare in network games abstract this paper studies information acquisition and use in network games the network structure incorporates both strategic complements positive links and substitutes negative links an information use game played on a correlation adjusted network is derived equilibrium inefficiencies in both acquisition and use of information are characterized inefficient bunching obtains in information acquisition where the spread in equilibrium signal precisions is below that prescribed by the planner the welfare analysis offers a policy intervention publicizing players information investments the more linked a player is positively or negatively the more strongly they respond to the policy to influence others information acquisition and use

signaling with costly acquisition of signals in this paper we investigate the consequences of introducing a cost to observe the signal in an otherwise standard signaling game beyond identifying equilibria which we contrast with those of a standard signaling game we study their robustness to two important classes of refinements acting through restrictions on out of equilibrium beliefs and through trembles our results suggest that more prominence should be given to the pooling outcome on the minimum signal

efficient use of information and social value of information this paper analyzes equilibrium and welfare for a tractable class of economies games that have externalities strategic complementarity or substitutability and heterogeneous information first we characterize the equilibrium use of information complementarity heightens the sensitivity of equilibrium actions to public information raising aggregate volatility whereas substitutability heightens the sensitivity to private information raising cross sectional dispersion next we define and characterize an efficiency benchmark designed to address whether the equilibrium use of information is optimal from a social perspective the efficient use of information reflects the social value of aligning choices across agents finally we examine the comparative statics of equilibrium welfare with respect to the information structure the social value of information is best understood by classifying economies according to the inefficiency if any in the equilibrium use of information we conclude with a few applications including production externalities beauty contests business cycles and large cournot and bertrand games

good disclosure bad disclosure we study the implications of public information in a model where market prices convey information to relevant decision makers and the uctuation of market prices is driven by multiple factors disclosure has a positive direct eect of providing new information and an indirect eect of changing the price informativeness if disclosure is about a variable of which real decision makers are well informed then the indirect eect is also positive so that the direct eect is ampli ed leading to a positive overall eect on real e ciency if disclosure is about a variable that real decision markers care to learn much then the indirect eect is negative and the direct eect is attenuated moreover in markets which aggregate private information eectively the negative indirect eect can dominate so that disclosure can harm real e ciency

the impact of corporate governance practices on r d efforts a look at shareholders rights cross listing and control pyramid the paper considers the impact of multiple shareholder oriented governance practices on rd decisions based on a sample of 5 528 firms belonging to 110 large french listed business groups our results substantiate the idea that shareholder oriented governance practices and a lower position in a control pyramid are better for rd investment the introduction of any additional shareholder oriented practice is found to result in more rd we show however that this anglo americanization of the french corporate governance system is only partial we provide evidence of the co existence of an old french system of corporate governance with a hybrid model of corporate governance the lack of concrete results on complementarity among shareholder oriented governance practices casts doubt on the stability of this hybrid model in the french context

learning in crowded markets abstract we present a novel entry game with endogenous information acquisition to study the welfare effects of opacity and competition potential entrants to an opaque market are uncertain about their competitive advantage relative to other investors i e their type they construct optimal costly signals to learn about their types where the marginal cost of learning captures the opacity of the market in general the individually optimal entry and learning decisions are socially suboptimal players over invest in learning and more opaque markets are associated with more crowding nevertheless more opaque markets might still lead to higher welfare by implying a better trade off between the degree of crowding and the total cost of learning similarly decreasing the share of smart investors in the market might also improve welfare however fierce competition is always detrimental to welfare as it leads to more wasteful learning without changing the level of crowding

enjoying the quiet life corporate governance and managerial preferences much of our understanding of corporations builds on the idea that managers when they are not closely monitored will pursue goals that are not in shareholders interests but what goals would managers pursue this paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences we use plant level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing of the laws we find that when managers are insulated from takeovers worker wages especially those of white collar workers rise the destruction of old plants falls but the creation of new plants also falls finally overall productivity and profitability decline in response to these laws our results suggest that active empire building may not be the norm and that managers may instead prefer to enjoy the quiet life

the chandlerian corporation and the theory of innovative enterprise through the synthesis of business history into a coherent and powerful analytical framework alfred chandler made an enduring intellectual contribution to the social sciences this essay outlines the implications of chandler s perspective for the theory of innovative enterprise embeds that theory in the social conditions of innovative enterprise analytical framework demonstrates the illogic of the neoclassical monopoly model and contends that the analysis of the dynamics and performance of industrial capitalism requires a methodology that integrates theory and history

the social value of public information with costly information acquisition abstract in a beauty contest framework public authorities decide the accuracy of public information evaluating how it affects individual actions and private information acquisition more precise public information increases welfare whenever its marginal cost does not exceed that of private information

endogenous information acquisition in coordination games in the context of a beauty contest coordination game in which payoffs 1 depend on the quadratic distance of actions from an unobserved state variable and 2 from the average action players choose how much costly attention to pay to vari 3 ous informative signals each signal has an underlying accuracy how precisely it 4 identifies the state and a clarity how easy it is to understand the unique linear 5 equilibrium has interesting properties the signals which receive attention are the 6 clearest available even if they have poor underlying accuracy the number of sig 7 nals observed falls as the complementarity of players actions rises and if actions 8 are more complementary the information endogenously acquired in equilibrium 9 is more public in nature the consequences of rational inattention constraints on 10

financial prices and information acquisition in large cournot markets abstract in the context of a large cournot market with dispersedly informed firms we show that while output decisions are strategic substitutes private information acquisition decisions can be strategic complements the reversal of incentives operates through the informational role played by the price of a financial asset whose payoff depends on firms output decisions our results rely on a novel mechanism whereby holding fixed the private information of financial traders when firms become more privately informed the financial asset price becomes less informative

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

does europe perform too little corporate r d a comparison of eu and non eu corporate r d performance this paper examines whether there are differences in private r d investment performance between the eu and the us and if so why the study is based on data from the 2008 eu industrial r d investment scoreboard the investigation assesses the effects of several very distinct factors that can determine the relative size of the overall r d intensities of the two economies these are the influence of sector composition structural effect vis a vis the intensity of r d in each sector intrinsic effect and the company demographics the paper finds that the lower overall corporate r d intensity for the eu is the result of sector specialisation structural effect the us has a stronger sectoral specialisation in the high r d intensity especially ict related sectors than does the eu and also has a much larger population of r d investing firms within these sectors since aggregate r d indicators are so closely dependent on industrial structures many of the debates and claims about differences in comparative r d performance are in effect about industrial structure rather than sector r d performance these have complex policy implications that are discussed in the closing section

social value of public information comment morris and shin 2002 is actually pro transparency not con the main result of morris and shin 2002 restated in papers by amato morris and shin 2002 and amato and shin 2003 and commented upon by the economist 2004 has been presented and interpreted as an anti transparency result more public information can be bad however some scrutiny of the result shows that it is actually pro transparency except in very special circumstances more public information is good furthermore for a conservative benchmark of equal precision in public and privateinformation social welfare is higher than in as ituation without public information

characterizing social value of information abstract this paper characterizes the social value of information in bayesian games with symmetric quadratic payoff functions and normally distributed public and private signals the main result provides a necessary and sufficient condition for welfare to increase with public or private information in so doing we represent welfare as a linear combination of the variance of a common term in an equilibrium strategy and that of an idiosyncratic term which are referred to as the common variance and the idiosyncratic variance of actions respectively the ratio of their coefficients is a key parameter in our condition if the coefficient of the common variance is relatively large welfare necessarily increases but if it is relatively small welfare can decrease using our condition we find eight types of games with different welfare effects of information

information acquisition and learning from prices over the business cycle abstract we study firms incentives to acquire costly information in booms and recessions to investigate the role of endogenous information in accounting for business cycles our model predicts that for a wide range of parameter values firms have a stronger incentive to acquire information when the economy has been in a recession and a pessimistic belief about the state of the economy prevails than after a boom when firms share an optimistic belief the equilibrium price system which features endogenous information transmission dampens aggregate fluctuations by discouraging information acquisition our welfare analysis reveals that information acquisition in the decentralized economy is not efficient this is due to inefficient employment dispersion arising from information heterogeneity in equilibrium time series data for the u s economy support the model s prediction of wages being more informative about total factor productivity after recessions than following booms

the influence of uncertainty on uk manufacturing investment this paper reports the results of including proxies for growth and inflation uncertainty in an accelerator style investment equation set up in error correction form for u k manufacturing plant and machinery expenditure the uncertainty proxies are constructed as cross section dispersion indices of independent economic forecasts the results confirm the importance of output growth uncertainty as a negative determinant of capital formation inflation uncertainty was found to have a short run influence only copyright 1991 by royal economic society