defensive strategies in the quality ladders abstract this paper analyses the potentially defensive behaviour of patent race winners and the ensuing effect on aggregate r d effort we propose a quality ladder model where leaders strategically acquire a technology advantage and are able to innovate in this context product market regulation by affecting this strategic behaviour may have either a positive or negative effect on aggregate r d intensity the negative effect is likely to pertain in liberal markets whereas the positive influence arises in more regulated environments and can be stronger for larger jumps in innovation these steady state equilibrium outcomes are consistent with the puzzling patterns in data from manufacturing industries in 14 oecd countries over the 1987 2003 period

the relation between price and marginal cost in u s industry a contradiction in a recent article in this journal hall 1988 examined productivity shocks at the industry level derived from constant returns to scale production functions in which firms were assumed to be competitive hall had two important conclusions first he showed that productivity shocks i e solow residuals were correlated with aggregate demand variables implying that the former are not exogenous impulses second his results implied that firms persistently charge prices above marginal costs making inappropriate the constant returns to scale competitive production function assumed in many theoretical frameworks because of the importance of hall s findings the article has led to many extensions evans 1992 confirms the empirical finding of significant correlations between productivity shocks and aggregate demand variables burnside eichenbaum and rebelo 1993 show that this correlation can be explained by introducing labor hoarding into a theoretical model with competitive firms and constant returns to scale production functions the markups above marginal cost are explained by eden and griliches 1991 and galeotti and schiantarelli 1991 by modifying the theoretical production function caballero and lyons 1992 using the hall data and methodology examine the possibility of external economies in the aggregate manufacturing production finally waldmann 199 1 argues in this journal that the

competition and corporate performance are people right to think that competition improves corporate performance my investigations indicate first that there are some theoretical reasons for believing this hypothesis to be correct but they are not overwhelming furthermore the existing empirical evidence on this question is weak however the results reported here based on an analysis of around 670 u k companies do provide some support for this view most important i present evidence that competition as measured by increased numbers of competitors or by lower levels of rents is associated with a significantly higher rate of total factor productivity growth

financial markets and development my views on this subject have been greatly affected both by the experience of developing countries during the past quarter century and by the major shift evolutionary if not revolutionary in the economists paradigm over that period we have seen that capital accumulation is not enough even the extremely high rates of savings of many of the socialist economies have not managed to compensate for their lack of ability in allocating capital and these countries have for the most part not fared well but extreme free market solutions have fared little better perhaps best illustrated by the experience of chile true believers in the doctrines of the left and the right have this in common they both claim that if the patient had only followed the doctor s orders more precisely the medicine would have worked

the informational content of initial public offerings the ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once a model is developed in which there is price risk from holding equity between periods when the uncertainty is small there must be pooling in the first period when uncertainty is large the pooling equilibria dominate the separating equilibrium the size of an entrepreneur s initial public offering of equity can be informative this point was made in leland and pyle 1977 and stiglitz 1982 an entrepreneur with a good project can signal the value of the project by his or her willingness to retain equity an implicit assumption of this analysis is that the entrepreneur has only one opportunity to sell equity the assumption of a single sale is important since once the entrepreneur has signalled his or her project value by retaining equity investors should be willing to purchase the remaining equity however if entrepreneurs with bad projects foresee this they too may wish to retain equity initially and render themselves indistinguishable from entrepreneurs with good projects the current paper develops a model with two trading periods to capture the impact of having repeat sales of equity there is a public offering in the first period then the entrepreneur can make an open market sale in the second period however there is exogenous price risk which makes it costly for the entrepreneur to wait to sell in this context the value of the entrepreneur s project may not be revealed in the first period retaining equity is not very costly when uncertainty is small and there will only be pooling equilibria in this case in such a situation no information is revealed in the first period when the level of uncertainty is great there does exist a separating equilibrium however the pooling equilibria pareto dominate the separating equilibrium throughout the analysis the focus will be on paretooptimal equilibria the idea that an informed agent can profitably trade over time has been examined in related contexts kyle 1985 looked at the optimal trading strategy for an insider whose sequence of purchases is hidden in the aggregate order flow in equilibrium the insider s information is not completely incorporated into the market price until the close of trading

going public and the enrichment of a supportive network some evidence from italian initial public offerings past research on initial public offerings suggests that the reputation of a company positively affects the success of the offering success is usually measured in financial terms as if the essence of the operation lay only in the short term inflow of money in this paper we investigate important albeit often neglected implications of going public by combining evidence from a series of preliminary case studies taken from the results of a survey of 57 italian initial public offerings evidence from our research suggests that besides providing an important inflow of capital going public may actually improve the reputational and social capital of a company by increasing its visibility prestige and perceived trustworthiness therefore going public may be an important way to support entrepreneurial activity as it may expand and reinforce the network of relationships that offer access to external resources complementary skills and investment opportunities

growth and trustified capitalism abstract previous models of quality improvements focus on what schumpeter called competitive capitalism innovating firms drive their rivals out of business in this paper a model which captures important aspects of schumpeter s notion of trustified capitalism is developed innovating firms capture market share from their rivals but do not drive them out of business most of the results of earlier models carry over for example the determinants of the growth rate of quality are exactly the same as in previous models however two differences do arise in contrast to previous models quality growth is guaranteed by diminishing returns to scale in r d also in contrast to previous models the laissez faire growth rate is unambiguously below the socially optimal growth rate the lack of ambiguity occurs because the negative profit destruction externality is weakened when innovating firms capture only part of their rivals s market share

growth with non drastic innovations and the persistence of leadership abstract in a model of endogenous growth with improvements in the quality of products i provide a new explanation of the persistence of leadership by assuming that innovations are non drastic and that the current leader has a move advantage in the next patent race under these circumstances the value of being leader exceeds temporary monopoly profit since the leader reaps an extra profit in the next patent race despite free entry by outsiders this will increase the incentive to innovate and hence the rate of growth which is higher than in the leapfrogging model however the welfare comparison of the leapfrogging and persistent leadership equilibria is ambiguous

australian ipo pricing in the short and long run abstract we analyse both initial underpricing and post listing returns for australian ipos our results are consistent with the view that unique institutional characteristics may have overwhelmed previous australian tests of equilibrium models of ipo underpricing the results also show that australian ipos significantly underperform market movements in the three year period subsequent to listing further investigation of these anomalous post listing returns lead us to reject various speculative bubble explanations rather the evidence suggests a curvilinear relationship between initial and subsequent returns although the economic significance of the relationship is low

the welfare cost of one size fits all patent protection to analyze the welfare gain from allowing for differentiated patent protection across sectors this study develops a two sector quality ladder growth model in which patent breadth is a policy variable and derives optimal patent breadth under two patent regimes we show that a uniform optimal patent breadth is a weighted average of sector specific optimal patent breadth and b sector specific optimal patent breadth is larger in the sector that has a larger market size and more technological opportunities to derive the optimal policy we allow for an arbitrary path of patent breadth and derive the optimal path by solving a stackelberg differential game we find that the optimal path of patent breadth under each patent regime is stationary time consistent and subgame perfect finally we perform a numerical investigation and find that even a moderate degree of asymmetry across sectors can generate a significant welfare cost of uniform patent protection

interjurisdictional capital mobility fiscal externality and a corrective subsidy abstract recent studies emphasize that local property taxation may result in inefficiently small amounts of local public spending this paper shows that the inefficiency can be traced to a fiscal externality when one jurisdiction increases its taxes it causes a flow of capital to other jurisdictions that increases their tax revenues the inefficiency can be corrected with a subsidy that internalizes the externality key empirical parameters determining the magnitude of the externality are identified illustrative calculations indicate that subsidy rates on the order of 40 might be required to achieve efficiency

signalling and the pricing of new issues this paper develops a signalling model with two signals two attributes and a continuum of signal levels and attribute types to explain new issue underpricing both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable intrinsic value of the firm and the variance of its cash flows many of the model s comparative statics results are novel empirically testable and consistent with the existing empirical evidence on new issues in particular the degree of underpricing which can be inferred from observable variables is positively related to the firm s post issue share price

competition and growth with step by step innovation an example this paper develops a simple example to analyse the relationship between product market competition and growth in a model with step by step innovations where laggards can never leapfrog the current industry leaders but instead must first catch up with the leaders before battling for technological leadership in the future unlike in existing schumpeterian models of growth more intense product market competition and or imitations may be growth enhancing

entrepreneurial optimism and the market for new issues this article analyzes the impact of entrepreneurial optimism on the market for new issues we find that the existence of optimists generates a new reason for entrepreneurs to own equity in their firms we show that optimism is a natural explanation for why some new issues are underpriced and others overpriced we also show that the impact of optimism on entrepreneurs equity holdings depends on the number of optimists absolute risk aversion and cash flow variance optimism makes entrepreneurs worse off in contrast optimism can make outside investors better off when entrepreneurs signal firm value by retaining shares and underpricing

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

competition imitation and growth with step by step innovation is more intense product market competition and imitation good or bad for growth this question is addressed in the context of an endogenous growth model with step by step innovations in which technological laggards must first catch up with the leading edge technology before battling for technological leadership in the future in contrast to earlier schumpeterian models in which innovations are always made by outsider firms who earn no rents if they fail to innovate and become monopolies if they do innovate here we find first that the usual schumpeterian effect of more intense product market competition pmc is almost always outweighed by the increased incentive for firms to innovate in order to escape competition so that pmc has a positive effect on growth second that a little imitation is almost always growth enhancing as it promotes more frequent neck and neck competition but too much imitation is unambiguously growth reducing the model thus points to complementary roles for competition anti trust policy and patent policy

the struggle to survive in the r d sector implications for innovation and growth by allowing for investment activities by research and development r d firms to prevent product obsolescence we show that if legal patent protection is too strong a higher r d subsidy rate delivers insufficient investments for survival in the r d sector depressing innovation and growth in the long run

signalling and renegotiation in contractual relationships this paper examines how the possibility of renegotiation affects contractual outcomes in signaling games when an infinite number of rounds of renegotiations are allowed before contracts are executed the main results of the paper are 1 contracts may still contain distortions 2 the popular efficient separating equilibrium outcome is never an equilibrium outcome with renegotiation 3 incentive compatibility constraints can be generalized to incorporate renegotiation 4 equilibrium outcomes can be separating and nevertheless depend on the uninformed player s prior and 5 renegotiation in signaling games may lead to outcomes similar to equilibrium outcomes of screening games in which multiple contract purchases are allowed copyright 1993 by the econometric society

intellectual property rights in a quality ladder model with persistent leadership this paper analyzes the effects of intellectual property rights in a quality ladder model of endogenous growth in which incumbent firms preemptively innovate in order to keep their position of leadership unlike in models with leapfrogging granting forward protection and imposing a non obviousness requirement reduces growth in the main case where entrants and incumbents have free access to the same r d technology infinite protection against imitation granted independently of the size of the lead maximizes growth if entrants have to engage in costly catch up before they can undertake frontier r d growth is maximal for a finite expected length of protection against imitation

anti competitive conduct in house r d and growth abstract incumbent firms have two basic possibilities to improve their competitive position in the product market investment in r d and the creation of entry barriers to the disadvantage of potential rivals e g through lobbying activities campaign contributions bribes or the adoption of incompatible technologies this paper proposes a simple oligopoly model which raises the possibility that such anti competitive conduct and r d investment are complementary activities for incumbents consequently an institutional framework or technological possibilities which encourage anti competitive conduct although impeding entry of potential rivals and accentuating standard oligopoly distortions may foster r d based growth and welfare however this outcome is less likely if entrants exert technological spillover effects e g through foreign direct investment stronger protection of intellectual property rights although triggering anti competitive conduct and thereby impeding market entry as well is more likely to foster economic growth

competition market selection and growth we study the effect of the competitive selection process on the economy s rate of growth in an extension of standard quality ladder models of endogenous growth we allow for the possibility that in each period several asymmetric firms representing an endogenously determined number of past innovators may be simultaneously active in an industry stronger competitive pressure then has conflicting effects on the incentive to innovate lowering prices but also selecting the more efficient firms we show that the market selection effect of competition always increases the incentive to innovate and find circumstances in which it can outweigh the traditional negative effect of lower prices

the relationship between ownership financing decisions and firm performance a signaling model we develop a signaling model to show how adverse selection and moral hazard interact to determine a firm s ownership structure and financing and investment decisions endogenously testable implications are derived regarding the relationship between insider ownership performance measures such as tobin s q ratio and elements of financial structure such as the debt equity ratio

the welfare effects of intergovernmental grants in an economy with distortionary local taxes a simple general equilibrium analysis this paper examines the welfare impact of intergovernmental transfers when recipient governments use distortionary taxes both lump sum and matching grants are investigated a distortionary factor depending on local demand and supply elasticities and the local tax rate on the taxed commodity determines the real income change to a jurisdiction per dollar transferred matching grants are dominated by lump sum grants when these can be set optimally for each recipient if grant policy must be uniform positive or negative matching rates are desired if equity adjusted distortionary factors are positively negatively correlated with local public service levels

litigation risk intermediation and the underpricing of initial public offerings we formally examine the role of litigation risk in initial public offering ipo pricing the underwriter s pricing decision trades off current revenue against expected future litigation costs both of which are increasing in the ipo price given a time consistency constraint and rational expectations on the part of investors however the standard litigation risk argument does not lead to equilibrium underpricing we develop a richer model that provides sufficient conditions under which there is equilibrium underpricing the issuer s choice of employing an underwriter versus floating the ipo on its own is examined and various testable implications of the model are developed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

venture capitalist certification in initial public offerings this paper provides support for the certification role of venture capitalists in initial public offerings consistent with the certification hypothesis a comparison of venture capital backed ipos with a control sample of nonventure capital backed ipos from 1983 through 1987 matched as closely as possible by industry and offering size indicates that venture capital backing results in significantly lower initial returns and gross spreads in effect the presence of venture capitalists in the issuing firms serves to lower the total costs of going public and to maximize the net proceeds to the offering firm in addition we document that venture capitalists retain a significant portion of their holdings in the firm after the ipo the ability of third party specialists to certify the value of securities issued by relatively unknown firms in capital markets that are characterized by asymmetric information between corporate insiders and public investors has attracted much academic interest in recent years several authors including james 1990 blackwell marr and spivey 1990 and barry muscarella peavy and vetsuypens 1991 have developed and tested models based at least in part on the formal certification hypothesis presented in booth and smith 1986 a related body of work represented by deangelo 1981 beatty and ritter 1986 titman and trueman 1986 johnson and miller 1988 carter 1990 simon 1990 and carter and manaster 1990 has examined how investment bankers and auditors help resolve the asymmetric information inherent in the initial public offering ipo process in this paper we examine whether the presence of venture capitalists as investors in a firm going public can certify that the offering price of the issue reflects all available and relevant inside information we hypothesize that venture capitalists can perform this function that it will be an economically

innovation by heterogeneous leaders we develop a schumpeterian growth model in which leaders and followers conduct research and development rd this result is consistent with the actual behaviors of some previous leader firms such as sony and eastman kodak moreover we show that subsidizing the r d of followers can promote the aggregate r d of leaders because promotion of followers r d decreases increases the number of leaders with larger smaller quality leads and smaller larger r d investments

capital income taxation and risk spreading with adverse selection domar and musgrave 1944 showed that taxing the return from risky investments may encourage risk taking the effect has come under attack as being one of partial analysis that would disappear in general equilibrium this paper shows that the contrary is true if capital markets suffer from adverse selection asymmetric information induces investors to bear risk that could be spread in the capital market the tendency to such behaviour may be increased by a tax on risky capital income in that case social risk spreading decreases while the opposite effect would hold if general equilibrium repercussions were ignored imposition du revenu de capital et repartition des risques quand il y a selection adverse domar et musgrave 1944 ont montre que l imposition des rendements sur les investisse ments risques pouvait encourager a courir plus de risque ce resultat a ete attaque comme resultat emergeant d une analyse d equilibre partiel et devant disparaitre en equilibre general