meta paradigm change and the theory of the firm many seemingly unrelated debates on the theory of the firm are in fact part of a single deeper transformation of the social sciences as the foundational assumptions of 20th century social science have slowly been shown by science to be false new sub paradigms have emerged which cumulatively drop i theoretical assumptions about markets to explain firms ii epistemological assumptions about knowledge to explain diversity and iii metaphysical assumptions about causality to explain technical change debates occur across each of these levels

bilateral bargaining with externalities this paper provides an analysis of a non cooperative pairwise bargaining game between agents in a network we establish that there exists an equilibrium that generates a coalitional bargaining division of the reduced surplus that arises as a result of externalities between agents that is we provide a non cooperative justification for a cooperative division of a non cooperative surplus the resulting division is related to the myerson shapley value with properties that are particularly useful and tractable in applications we demonstrate this by examining buyer seller networks and vertical foreclosure

the ir relevance of real wage rigidity in the new keynesian model with search frictions we explore the role of real wage dynamics in a new keynesian business cycle model with search and matching frictions in the labor market both job creation and destruction are endogenous we show that the model generates counterfactual inflation and labor market dynamics in particular it fails to generate a beveridge curve vacancies and unemployment are positively correlated introducing real wage rigidity leads to a negative correlation and increases the magnitude of labor market flows to more realistic values however inflation dynamics are only weakly affected by real wage rigidity this is because of the presence of labor market frictions which generate long run employment relationships the measure of real marginal cost that is relevant for inflation dynamics via the phillips curve contains a dynamic component that does not necessarily move with real wages

exclusive contracts and protection of investments we consider the effect of a renegotiable exclusive contract restricting a buyer to purchase from only one seller on the levels of noncontractible investments undertaken in their relationship contrary to some informal claims in the literature we find that exclusivity has no effect when all investments are fully specific to the relationship i e are purely internal exclusivity does matter when investments affect the value of the buyer s trade with other sellers i e have external effects we examine the effects of exclusivity on investments and aggregate welfare and the private incentives of the buyer seller coalition to use it

a general equilibrium analysis of software development implications of copyright protection and contract enforcement abstract we develop a general equilibrium model to study the implications of a legal environment on the organization of software production we show that contract enforcement determines the organizational mode i e in house versus outsourcing of customized software development while copyright protection affects both packaged software as well as customized software development we obtain some testable results when copyright protection is weak only customized software will be developed when copyright protection is strong both customized software and packaged software will be developed environment changes in one software market affect the equilibrium in the other software market

evolutionary theorizing in economics modern economic analysis oriented toward understanding the workings of economies that make extensive use of markets came into existence with three guiding questions all central in adam smith s 1776 1937 the wealth of nations one question concerned order without any central authority guiding and commanding action how is economic activity coordinated the second question was the challenge of explaining the prevailing constellation of prices inputs and outputs what explains the price of labor and the rent of land the third question addressed the processes of economic progress or development smith and other early economists clearly were impressed by the inventiveness the energy and the growing productivity generated by the evolving market economy how to understand its dynamics the first two questions have defined continuing central concerns of the discipline of economics since they first were posed over two centuries ago when not posed in the context of an economy that is understood as in the process of developing they seem to pull the focus of theorizing toward equilibrium conditions the third question concerned with the processes driving economic progress pulls the theorizing toward an evolutionary orientation the question of economic development has waxed and waned in centrality to the discipline as has the importance of evolutionary theorizing during the first several decades of the twentieth century evolutionary thinking and language was widespread in economics but as one contrasts the economic

strategic vertical integration without foreclosure we determine the endogenous degree of vertical integration in a model of successive oligopoly that captures both efficiency gains and strategic effects foreclosure effects are purposely left aside the profitability of integration originates in the greater ability of integrated firms to adopt a specific type of technologies we show that vertical merger waves can stop by themselves before integration is complete because of strategic substitutability in vertical integration this is in contrast to the strategic complementarity result in mclaren 2000 that leads to either complete integration or complete separation

job independence as an incentive device a firm can either subject its workers to strict rules and regulations or grant them independence if independent they can make entrenchment investments which will not only raise their productivity but also make the firm depend on their cooperation however in contrast to a standard holdup problem the firm can afterwards take over control thus stripping such workers of a part of their bargaining assets this leads to structural distortions and may aggravate the holdup problem however the threat of partial expropriation may also alleviate the holdup problem and even induce overinvestment

vertical foreclosure with the choice of input specifications we develop an equilibrium model of vertical foreclosure with the choice of input specifications vertical foreclosure occurs as the upstream division of the integrated firm makes a specialized input for its sister downstream division while it would as an independent firm provide a generalized input the changes in incentives with vertical integration can be explained by the externalities the choice of a specialized input entails vertical integration allows the upstream firm to internalize the benefit of raising the rival firm s costs at the downstream level we derive conditions for equilibrium vertical foreclosure to occur and discuss its welfare consequences

markets for ownership the prevailing economic theory of the firm based on a property rights perspective has demonstrated that ownership by dispensable outside parties is an inefficient outcome relative to ownership by productive agents in order to better understand observed patterns of ownership this paper considers the outcome of ma rkets for ownership that operate prior to production taking place the main result is that outside parties will often become the equilibrium asset owners this is precisely because but for ownership such parties would not earn rents in contrast productive agents earn rents even when they do not own assets given that their contribution is complementary with other productive agents their willingness to pay for ownership is less than that of an outside party this result is robust to the introduction of moderate levels of inefficiency arising from outside ownership and to a consideration of opportunities for re sale before production begins the main conclusion drawn is that the nature of the operation of markets for ownership stands alongside incentive effects as important predictors of firm boundaries journal of economic literature classification numbers d23 l22

organizing technological interdependencies a coordination perspective on the firm this paper develops a coordination perspective on the firm the basic idea is to combine insights into the division of labor with insights into the allocation of property rights thus a basic argument is that use rights over productive assets are necessary in order to accumulate the experience needed to perform improvements in production an increase in the division of labor in production accelerates the accumulation of skills from learning by doing in production however an increasing division of labor introduces greater complexity and new kinds of tools and equipment and this in turn can create uncertainty about the best way of coordinating the specialized and interdependent tasks the result may be bottlenecks in production and uneven development of components experimenting with the coordination of tasks is necessary in order to eliminate these problems however such experimentation is best facilitated by a certain structure of property rights coordination by direction provides a cheap way of conducting the experiments needed to collect information on how best to coordinate interdependent activities copyright 2001 by oxford university press

equilibrium unemployment job flows and inflation dynamics this paper develops a general equilibrium model to explain a set of facts regarding job flows unemployment and inflation dynamics it integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities the labor market displays matching frictions and endogenous job destruction the model can explain the cyclical behavior of unemployment job creation job destruction and the joint fluctuations of the labor input along both the extensive and the intensive margin conditional on a shock to monetary policy allowing for variation of the labor input at the extensive margin leads to a significantly lower elasticity of marginal costs with respect to output this helps to explain the sluggishness of inflation and the persistence of output after a monetary policy shock

can vertical integration by a monopsonist harm consumer welfare abstract vertical integration by a monopsonist is generally believed not to harm consumers this paper demonstrates in a natural economic setting that this conventional wisdom may not hold we model one on one bargaining between a monopsonist and independent suppliers when the set of suppliers cannot be expanded easily ex post and show that a vertically separated monopolist is vulnerable to holdup without integration we demonstrate that a bottleneck monopsonist has an incentive to encourage more upstream entry than would arise in a pure neoclassical monopoly having more suppliers mitigates the holdup power of any one this however distorts the cost structure of the industry toward greater industry output and hence lowers final good prices vertical integration mitigates the hold up problem faced by the monopsonist it allows it to generate and appropriate a greater level of industry profits at the expense of consumers

market structure and organizational form this paper studies the determinants of a firm s organizational form in the context of an imperfectly competitive industry there are two kinds of organizational forms the multi divisional form m form and the unitary form u form an m form firm suffers from ignorance of demand externalities among different products and double marginalization is eliminated in contrast in a u form firm demand externalities are taken into consideration and double marginalization exists a firm s optimal choice of organizational form depends on the market structure

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

the value of transparency in multidivisional firms we study internal incentives transparency and firm performance in multidivisional organizations two independent divisions of the same firm design internal incentives and decide whether to publicly disclose their performances in each division a risk neutral principal deals with a risk averse exclusive agent under moral hazard each agent exerts an unverifiable effort that creates a spillover on the effort cost of the other agent we first study the determinants of the optimal principal agent contract with and without performance transparency then we show how effort spillovers affect the equilibrium communication behavior of each division both principals commit to disclose the performance of their agents in equilibrium when efforts are complements while no communication is the only equilibrium outcome when efforts are substitutes

vertical mergers in procurement markets abstract this paper uses computational methods that reveal ambiguous strategic effects of vertical mergers in a duopoly setting featuring incomplete information about sellers costs and differences in sellers productive capabilities first vertical mergers can be jointly unprofitable second the buyer s preferred merger partner is almost always the seller with lower expected costs and is typically the larger seller third vertical mergers always reduce the unintegrated seller s profits sometimes dramatically finally vertical mergers can increase total welfare some of the results contrast qualitatively with unambiguous findings from models with symmetric sellers which suggests that caution should be used in drawing general inferences from those models

information concealment in the theory of vertical integration abstract a model of vertical integration is proposed in which the motive for vertical integration lies in the concealment of information to other firms rather than uncovering of a new information since a vertically integrated firm trades internally rather than making publicly observable market transactions vertical integration offers an opportunity for the integrated firm to turn previously observable market data into private information it will be shown that when the acquisition cost of input is uncertain the ex ante profit of a downstream firm will increase if the ex post realized value is private information thereby providing a theory of vertical integration based on strategic information concealment welfare implications of vertical integration are also considered finally we demonstrate that the vertically integrated firm will adopt an inefficient sourcing rule when there are alternative but inferior input suppliers

downstream vertical foreclosure and upstream innovation i examine a link between downstream foreclosure and upstream innovation the crucial ingredient of the model is the presence of dynamic economies of scale upstream in the form of competition in r d the reason an upstream supplier has a captive buyer is to force rival suppliers to incur the disadvantages of low scale production and discourage them from innovating the downstream buyer is offered favorable terms and is convinced to sign an exclusive supply contract and accept captivity in this context downstream foreclosure may reduce consumer welfare

integration and productivity satellite tracked evidence this paper introduces satellite tracked real time data from a large fishing firm managing its vertically horizontally and geographically linked ships to study the causal impact of integration on total factor productivity tfp after the firm acquired its vertically unintegrated contractual fish suppliers tfp increased 16 among newly integrated ships whereas it did not vary for already owned ships some classic mechanisms such as increased effort due to monitoring do not systematically explain tfp gains under integration whereas evidence on hold up threat alleviation is mixed importantly enhanced knowledge transfer and hierarchical authority enacting productivity improving operational practices among newly integrated ships are more likely explanations of the results this paper was accepted by bruno cassiman business strategy

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

short term transmission line maintenance scheduling in a deregulated system in this paper the authors present a decomposition approach based on duality theory for line maintenance scheduling with transmission and voltage constraints the given formulation consists of a master program and sub problems with two independent programming in the master problem the maintenance problem is solved and in the subproblems the transmission and voltage problems are solved independently since canceling a transaction or purchasing reactive power relates to the loss of revenue the trade off between maintenance cost and revenue loss will be optimized in the proposed method the test results on the modified ieee 118 bus system demonstrate that limits on transmission and voltage affect the line maintenance scheduling and increase the maintenance cost while introducing the loss of revenue as one of the objective functions the proposed method is flexible enough to accommodate various pricing objectives and methods

outsourcing vertical integration and price vs quantity competition abstract we show that standard conclusions about duopoly competition can be reversed when the production of key inputs is outsourced to a vertically integrated retail competitor with upstream market power under such outsourcing bertrand competition can produce higher prices higher industry profit lower consumer surplus and lower total surplus than cournot competition in addition to limiting the intensity of retail competition bertrand competition can limit the extent of wholesale competition by reducing the incentive of retail providers to produce key inputs themselves

the hold up problem in a repeated relationship abstract much of the literature on what determines the scope of operations of a producer has centered on the hold up problem the standard results indicate the hold up problem may lead to suboptimal investments and therefore integration may improve the organization of production in this paper we consider a repeated relationship with durable investments and show the possibility of integration improves the choice of investments and there is no integration in equilibrium the equilibrium contract is non exclusive in order to allow the buyer to choose integration in later periods we derive this result in the presence of very simple and incomplete contracts

optimal fiscal and monetary policy some recent results this paper studies the quantitative properties of fiscal and monetary policy in business cycle models in terms of fiscal policy optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average in terms of monetary policy the friedman rule is optimal nominal interest rates are zero and optimal monetary policy is activist in the sense that it responds to shocks to the economy

non parametric analysis of multi output production with joint inputs we focus on analysing cost minimising production behaviour in multi output settings we distinguish between two approaches for modelling the use of joint inputs the cooperative approach assumes cost minimisation at the aggregate firm level while the non cooperative approach assumes cost minimisation at the level of the individual output division our framework extends the existing non parametric framework for analysing single output production an empirical application to the english and welsh drinking water and sewerage sector shows the practical usefulness of our framework specifically we compare the empirical validity of the cooperative and non cooperative models for describing the observed production behaviour

vertical integration raising rivals costs and upstream collusion abstract this paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear as a first step the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated it turns out this is the joint profit maximum of the colluding firms the discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry while the previous literature has found it difficult to reconcile raising rivals costs strategies following a vertical merger with equilibrium behavior in the static game they are subgame perfect in the repeated game studied here

product improvement and technological tying in a winner take all market in a winner take all duopoly market for systems in which rms invest to improve their products a vertically integrated monopoly supplier of an essential system component may have an incentive to advantage itself by technological tying that is by designing the component to work better in its own system if the vertically integrated rm is prevented from technologically tying then there is an equilibrium in which the more e cient rm invests and serves the entire market however another equilibrium may exist in which the less e cient rm invests and captures the market technological tying enables a vertically integrated rm to foreclose its rival the welfare implications of technological tying are ambiguous and depend on the asymmetric qualities of the system suppliers and on equilibrium selection

vertical integration in the u s auto industry a note on the influence of transaction specific assets abstract recent refinements in the theory of the firm suggest that organization form may be sensitive not only to the degree to which assets are specific to a transaction but also to the type of capital employed this paper reports evidence regarding the relative influence of transaction specific investments in physical and human capital on the pattern of vertical integration using new data obtained directly from u s auto manufacturers the results support the proposition that investments in specialized technical know how have a stronger influence than those in specialized physical capital on the decision to integrate production within the firm

pooling access and countervailing power in channel governance fruit and vegetable marketing organization the greenery has experienced various governance structure changes like horizontal merger forward integration and the emergence of grower associations a multilateral incomplete contracting model is presented to account for these changes by analysing the interactions between pooling access and countervailing power this model does not only explain the changes at the greenery but it contributes also to the design of efficient channel governance this paper was accepted by pradeep chintagunta and preyas desai special issue editors this paper was accepted by pradeep chintagunta and preyas desai special issue editors

non cooperative bargaining theory an introduction the paper provides an informal introduction to some of the main themes of the recent literature on non cooperative or sequential bargaining models it focuses in particular on the relationship between the new approach and the traditional axiomatic approach exemplified by nash bargaining theory it illustrates the new insights offered by the non cooperative approach by reference to a detailed analysis of the manner in which the presence of an outside option available to one of the parties will affect the negotiated outcome finally the difficulties which arise in extending this analysis to two person bargaining with incomplete information and to n person bargaining are discussed this is a revised version of the fourth review of economic studies lecture presented in april 1985 at the joint meeting of the association of university teachers of economics and the royal economic society held in oxford the choice of lecturer is made by a panel whose members are currently professors hahn mirrlees and nobay and the paper is refereed in the usual way this paper aims to provide an informal and elementary introduction to an approach to bargaining which has received a great deal of attention over the past few years the approach involves writing down some particular sequence of moves offers and replies to be made over time in the course of negotiations and then looking for a non cooperative equilibrium in the game thus specified in practice a perfect equilibrium or in games of incomplete information a sequential equilibrium while the approach appears at first sight to be very different in spirit from the traditional axiomatic approach in which a bargaining solution is specified by appealing to a number of general requirements which are deemed appropriate on the basis of some a priori considerations the two approaches are in fact complementary while the

multilateral bargaining and downstream competition we examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers in these relationships the negotiations are interdependent and bargaining externality may arise across the retailers in addition the timing by which the manufacturer negotiates with the retailers becomes important in simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation we show that simultaneous bargaining is optimal for the manufacturer when the retail prices and profitability are similar and sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large as a result of ex post renegotiations the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price and exclusively supply only the retailer who charged a relatively high retail price and maintained high channel profitability moreover ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition

genco s risk based maintenance outage scheduling this paper presents a stochastic model for the optimal risk based generation maintenance outage scheduling based on hourly price based unit commitment in a generation company genco such maintenance outage schedules will be submitted by gencos to the iso for approval before implementation the objective of a genco is to consider financial risks when scheduling its midterm maintenance outages the genco also coordinates its proposed outage scheduling with short term unit commitment for maximizing payoffs the proposed model is a stochastic mixed integer linear program in which random hourly prices of energy ancillary services and fuel are modeled as scenarios in the monte carlo method financial risks associated with price uncertainty are considered by applying expected downside risks which are incorporated explicitly as constraints this paper shows that gencos could decrease financial risks by adjusting expected payoffs illustrative examples show the calculation of genco s midterm generation maintenance schedule risk level hourly unit commitment and hourly dispatch for bidding into energy and ancillary services markets

ramsey monetary policy with labor market frictions abstract traditional new keynesian models prescribe that optimal monetary policy should aim at price stability in the absence of a labor market frictions the monetary authority faces no unemployment inflation trade off the design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market optimal policy features deviations from price stability in response to both productivity and government expenditure shocks when the hosios 1990 on the efficiency of matching and related models of search and unemployment review of economic studies 57 2 279 298 condition is not met search externalities make the flexible price allocation unfeasible optimal deviations from price stability increase with workers bargaining power as firms incentives to post vacancies fall and unemployment fluctuates above the pareto efficient one

hedging and vertical integration in electricity markets this paper analyzes the interactions between competitive wholesale spot retail and forward markets and vertical integration in electricity markets we develop an equilibrium model with producers retailers and traders to study and quantify the impact of forward markets and vertical integration on prices risk premia and retail market shares we point out that forward hedging and vertical integration are two separate mechanisms for demand and spot price risk diversification that both reduce the retail price and increase retail market shares we show that they differ in their impact on prices and firms utility because of the asymmetry between production and retail segments vertical integration restores the symmetry between producers and retailers exposure to demand risk whereas linear forward contracts do not vertical integration is superior to forward hedging when retailers are highly risk averse we illustrate our analysis with data from the french electricity market this paper was accepted by wei xiong finance

2 the institutional structure of production 1 prize lecture to the memory of alfred nobel december 9 1991 this abstract was borrowed from another version of this item

good times bad times and vertical upstream integration abstract we consider a set of downstream firms each of which has a stochastic requirement for a particular input downstream firms can produce the input themselves yet do not trade it upstream firms produce the input to sell it through a walrasian market to downstream firms efficient pooling of capacities requires the input to be produced by upstream firms and traded in the market yet downstream firms will always vertically integrate by producing some of its own input needs a downstream firm cuts down on aggregate input demand thus depressing prices in the market

tax smoothing in frictional labor markets we re examine the optimality of tax smoothing from the point of view of frictional labor markets our central result is that whether or not this cornerstone optimal scal policy pre

some stylized facts on organization and its evolution abstract there is a striking difference between the large number of theoretical papers on firm organization and the lack of quantitative empirical evidence if on the one side economists are increasingly concerned with organization of firms on the other side organization still remains an ambiguous concept hardly analyzed empirically in this paper we develop a new empirical methodology based upon business history and previous theoretical works which allows us to describe some aspects of the organization of firms in quantitative terms this approach is instrumental to analyzing the hierarchical structure and the allocation of decision making activities in a sample composed of 438 italian metalworking plants we also study the dynamics of firm organization in the period 1975 1997 the results of the analysis show that the static choice of the organizational form crucially relies upon the loss of control phenomenon they also illustrate that the dynamics of hierarchical structure follows an inertial process characterized by incremental adjustments lastly both the organization of firms and more interestingly its evolution differ from one category of firms to another depending crucially on firm size

crossroads the organization of economic activity transaction costs firm capabilities and the nature of governance in a recent 1993 paper in organization science hennart discussed the underlying logic based on transaction cost and agency theory for explaining the choice between firms and markets and the reason why most transactions have both firm like and market like properties relying on williamson s comparative institutional approach which studies economic organization from a transaction cost minimizing point of view under the assumption of opportunism the argument was made that transaction cost tc logic provides a complete theory of the organization of economic activity in this paper i argue that with its purely incentive based logic governed by assumptions of opportunism tc economics is fundamentally incapable of being a complete theory of economic organization the notion of the firm as a bundle of transactions or contracts is an inadequate and shallow basis for a theory of the firm since it basically ignores the essential notion of the firm as a bundle of knowledge and the underlying processes there

the dynamics of resource allocation in research organizations abstract as a first step towards understanding the evolution of small groups in firms this paper develops and tests a simple decision theoretic model of research unit evolution in which as managers resolve their uncertainty over time they shut down under performing units and remove under performing unit heads the selection process generates several testable hypotheses about how unit and head characteristics affect the assignment of heads to units and resource allocation within the firm data on research units in firms is used to test the model and estimate the relative importance of the different effects on resource allocation

wheeling of power under deregulated environment of power system a bibilographical survey the power industry is moving rapidly from regulated conventional setup to a deregulated environment there is an urgent need to keep a track of international experiences and activities taking place in this emerging field this paper gives a bibliographical survey and general backgrounds of research and development in the field of power system wheeling under deregulated environment based on over 170 published articles wheeling in general and the establishment of wheeling rate in particular are subjects of extensive debate today this will be very much useful for all countries especially those developing countries which are moving toward the unbundling of electricity supply industry esi the collected literature have been divided into many section so that new researchers do not face any difficulty for obtaining literature particularly in the area of wheeling of power under deregulated environment

equilibrium vertical foreclosure the authors formulate a complete but analytically simple equilibrium model of vertical mergers to evaluate the logic of standard vertical foreclosure claims and the criticisms made of those claims the model includes incentives of the integrated firm and unintegrated input suppliers to exclude rivals and the potential holdout problem in this fully specified model vertical foreclosure can emerge in equilibrium copyright 1990 by american economic association

vertical integration in the presence of upstream competition we analyse vertical integration when there is upstream competition and compare outcomes to the case where upstream assets are owned by a single agent i e upstream monopoly in so doing we make two contributions to the modelling of strategic vertical integration first we base industry structure namely the ownership of assets firmly within the property rights approach to firm boundaries second we model the potential multilateral negotiations using a fully specified non cooperative bargaining model designed to easily compare outcomes achieved under upstream competition and monopoly given this we demonstrate that vertical integration can alter the joint payoffs of integrating parties in ex post bargaining however this bargaining effect is stronger for firms integrating under upstream competition than upstream monopoly we also consider the potential for integration to internalise competitive externalities in manner that cannot be achieved under non integration we demonstrate that ex post monopolization is more likely to occur when there is an upstream monopoly than when there is upstream competition our general conclusion is that the simple intuition that the presence of upstream competition can mitigate and reduce the incentives for socially undesirable vertical integration is misplaced and depending upon the strength of downstream competition i e product differentiation the opposite could easily be the case journal of economic literature classification number l42

strategic aspects of vertical delegation abstract this paper offers an overview of the strategic aspects of situations where either institutionally or contractually a firm delegates some of its decisions to another firm a subsidiary an internal division etc delegation may have several kinds of strategic benefits in the short term it may improve the competitive position of the firm or induce a more lenient behavior from its competitors in the long run it may be used to deter the entry of potential competitors to foreclose market access or to induce actual competitors to exit the paper analyzes the trade off between these possible benefits and the agency costs of delegation and emphasizes the key issues of credibility and commitment

cost of wheeling methodologies the cost of wheeling and the methodology by which it is computed is a high priority problem throughout the power industry due to the growth in transmission facilities the cost differentials between utility companies and the dramatic growth in nonutility generation capacity this paper contains descriptions and summaries of computational procedures and data requirements of four embedded cost methodologies two long run incremental cost methods and the short run marginal cost method four methodologies are also presented for allocating the wheeling costs among a number of wheels when simultaneously present on a company s system as required for the standard long run incremental cost method

on the relation between asset ownership and specific investments experimental results are presented for a simplified version of hart s 1995 theory of the firm theory predicts that investment levels remain constant when investors no trade pay offs increase if these pay offs are threat points while they may decrease when no trade pay offs are outside options our results support these predictions in a relative sense average investment levels exceed the predicted level actual investment behaviour is consistent with the outcomes of the bargaining stage the play of the game is supported by a reciprocity mechanism in which non investors consider higher investment levels as fair behaviour which deserves a reward investors anticipate this

vertical mergers and market foreclosure ythe model in this paper illustrates three effects of vertical mergers when both stages are oligopolistic and vertically integrated and unintegrated producers coexist first the merging firm increases its final good output second the resulting backward shift in the residual demand curve facing unintegrated final good producers ylowers their demand for the intermediate good third the merged firm withdraws from the intermediate good market the increased concentration pushes the intermediate good price upward which effect dominates depends on market structure under some conditions a vertical merger causes the price of the final good to increase

the unemployment volatility puzzle is wage stickiness the answer i discuss the failure of the canonical search and matching model to match the cyclical volatility in the job finding rate i show that job creation in the model is influenced by wages in new matches i summarize microeconometric evidence and find that wages in new matches are volatile and consistent with the model s key predictions therefore explanations of the unemployment volatility puzzle have to preserve the cyclical volatility of wages i discuss a modification of the model based on fixed matching costs that can increase cyclical unemployment volatility and is consistent with wage flexibility in new matches

downward wage rigidities and optimal monetary policy in a monetary union this paper analyses the implications of heterogeneity in the type of downward wage rigidity nominal or real for optimal monetary policy in a monetary union with asymmetric wage adjustment costs indexation in one region of the union reduces optimal grease inflation in the presence of common productivity shocks large common shocks may have sizeable and persistent effects on the intra union terms of trade whereby the region characterized by downward real wage rigidity adjusts with a persistent loss of competitiveness in response to asymmetric productivity shocks there is no role for grease inflation because relative price changes facilitating the real wage changes dominate the adjustment mechanism

inequality incomplete contracts and the size distribution of business firms this article analyzes the effects of intrafirm bargaining on the formation of firms in an economy with imperfect capital markets and contracting constraints in equilibrium wealth inequality induces a heterogeneous distribution of firm sizes allowing for firms both too small and too large in terms of technical efficiency the findings connect well to empirical facts such as the missing middle of firm size distributions in developing countries the model can encompass a nonmonotonic relationship between aggregate output and inequality it turns out that an inflow of capital may indeed decrease output in absolute terms

vertical integration as a source of hold up while vertical integration is traditionally seen as a solution to the hold up problem this article highlights instead that it can generate hold up problems for rivals we consider a successive duopoly where downstream firms invest and then secure support from an upstream supplier we first show that vertical integration generates ex ante incentives to create hold up problems an integrated supplier is willing to pre commit itself to appropriating or dissipating part of its customer s profits to expose the independent rival to being held up by the other supplier and discourage in this way the rival s investment we then show that even in the absence of any pre commitment vertical integration also creates hold up problems ex post when degrading the quality of the support provided to one downstream firm benefits its rival we also provide illustrations in terms of standard industrial organization models and of antitrust cases and discuss the robustness of the insights

innovation market structure and the holdup problem investment incentives and coordination abstract i analyze the innovation incentives under monopoly and duopoly provision of horizontally differentiated products purchased via bilateral negotiations integrating the market structure and innovation literature with the holdup literature i show that competition can improve local incentives for non contractible investment because innovation levels are generally strategic substitutes however there can be multiple duopoly equilibria in some circumstances monopoly can provide a coordination device that can lead to greater expected welfare despite inferior local innovation incentives the conditions for this to be the case however are quite restrictive

incomplete contracts vertical integration and supply assurance this paper extends the analysis of transactions cost models of vertical integration to multilateral settings its main focus is on supply assurance concerns which arise when several downstream firms are competing for inputs in limited supply integration reduces supply assurance concerns for an integrating firm but it may increase them for others therefore to explain the scope of any firm one must consider the overall network of production and distribution relations three fundamental questions are addressed 1 what are the effects of different integration structures 2 what are the determinants of the socially efficient integration structures 3 in what way do equilibrium integration structures differ from socially efficient structures

optimal long run inflation with occasionally binding financial constraints abstract this paper studies the optimal long run inflation rate in a simple new keynesian model with occasionally binding collateral constraints that intermediate good firms face on hiring labor the paper finds that the optimal long run annual inflation rate is around 1 5 if the economy is hit by a total factor productivity tfp shock and nearly 2 5 if the economy is subject to a markup shock the shadow value of the collateral constraint is akin to an endogenous cost push shock differently from usual cost push shocks however this shock is asymmetric as it takes non negative values only since the mean of this asymmetric endogenous cost push shock is positive inflation is also positive on average in addition a binding collateral constraint resembles a time varying tax on labor which the monetary authority can smooth by setting a positive inflation rate more generally the basic result is related to standard ramsey theory in that optimal policy smoothes distortions over time

search and matching frictions and optimal monetary policy abstract a recent literature has merged the new keynesian and the search and matching frameworks which has allowed the former to analyze the joint dynamics of unemployment and inflation this paper analyzes optimal monetary policy in this kind of hybrid framework i show that zero inflation is optimal when all wages are nash bargained in every period and the economy s steady state is efficient in the more realistic case in which nominal wage bargaining is staggered a case against price stability arises in response to real shocks the central bank should use price inflation so as to avoid excessive unemployment volatility and excessive dispersion in hiring rates for a plausible calibration the welfare loss under the zero inflation policy is about three times as large as under the optimal policy

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

pricing transmission services in the context of industry deregulation the changing structure of the electricity supply industry and the emergence of independent power producers and independent customers is bringing transmission pricing into a new focus the costs of operating maintaining and expanding the transmission system that is pricing transmission services needs to be addressed this has to be done on an economically rational and technically meaningful basis and this paper suggests an approach which distinguishes between operating and embedded costs and develops separate methods in respect of each of these components capacity use as well as reliability benefits derived by different users are taken into account in the disbursement of charges for investment recovery new insights into the marginal pricing approach to the recovery of operating costs are also briefly mentioned

a multi task principal agent approach to organizational form this paper studies the choice of organizational forms in a multi task principal agent model we compare a functional organization in which the firm is organized into functional departments such as marketing and r d to a product based organization in which the firm is organized into product lines managers compensation can be based on noisy measures of product line profits measures of a functional area s contribution to total profits are not available however this effect favors the product organization however if there are significant asymmetries between functional area contributions to organizational success and cross product externalities within functions organizing along functional lines may dominate the product organization the functional organization can also dominate when a function is characterized by strong externalities while the other is not

optimal monetary policy rules with labor market frictions abstract this paper studies optimal monetary policy rules in a framework with sticky prices matching frictions and real wage rigidities optimal policy is given by a constrained ramsey plan in which the monetary authority maximizes the agents welfare subject to the competitive economy relations and the assumed monetary policy rule i find that the optimal rule should respond to unemployment alongside with inflation this is so since models with matching frictions unlike standard new keynesian models feature a congestion externality that makes unemployment inefficiently high a strong response to inflation remains optimal while a response to output is always welfare detrimental

factors affecting the power of technological paradigms it is clear that the power of technological paradigms proposed by dosi 1982 varies greatly across fields of practice in the sense that in certain field s progress has been much more rapid than in others where comparable resources have been applied to the effort this essay explores the factors behind these differences it proposes that one important factor is the extent to which the technology in a field is controllable and replicable another factor is the strength of the supporting sciences it is argued that these factors are strongly intertwined with the causal arrows going both ways

equilibrium structures in vertical oligopoly abstract the central purpose of this paper is to examine vertical integration as an equilibrium phenomenon we model it as integration between cournot oligopolists in both the upstream and the downstream stages we consider the issue of private profitability versus collective profitability and show that under several situations the equilibrium outcomes may result in a prisoner s dilemma the analysis is extended to consider equilibrium outcomes in a dynamic setting where we find no integration to be a relatively common outcome

the contractual nature of the firm for their helpful comments i am grateful to armen a alchian yoram barzel keith leffler john s mcgee and dean worcester 1 ronald h coase the nature of the firm 4 economica 386 1937 the paper however was written several years earlier see note 3 infra 2 the social sciences citation index provides the following information breaking down the period of 1966 80 into three five year periods the total citations of coase s firm paper for each subperiod are 1966 70 17 citations 1971 75 47 citations and 1976 80 105 citations

exclusive contracts foster relationship specific investment exclusive contracts prohibit one or both parties from trading with anyone else contrary to earlier findings we show that investments that are specific to the contracting parties may be encouraged by exclusivity results depend on the nature of investments and the bargaining solution the major part of the analysis shows that exclusivity deals designed to assure the supply of essential inputs promote investment infinite penalties for breach even if ex post renegotiable may result in excessive investment in which case a positive but finite damage payment yields the first best outcome

dynamic common agency and investment the economics of movie distribution i introduction the management of vertical relationships is one of the fundamental issues addressed by contract and organization theorists how do contract choices interact with other strategic choices what are the consequences of vertical integration answers to these questions inform management strategy and public policy this article analyzes vertical relationships and strategic behavior in the movie distribution market vertical relationships in dynamic environments have been neglected and this article is the first to analyze an infinite horizon common agency model that considers vertical integration and investment the model has two distributors studios or independent distributors and one exhibitor theater distributors can invest each period before contracting with the exhibitor a distributor s investment stochastically improves its movies the probability of having hits rises dynamic strategic interaction is particularly important in the movie business and the infinite horizon model explains several facts that cannot be addressed with a static or two period model 1 in the model distributors avoid simultaneous new hit releases and hits stay in the theater longer than flops in reality release timing and run lengths are critical choices distributors often adjust release dates to avoid competing head to head chisholm 1999 krider and weinberg 1998 reardon 1992 and run lengths depend on early performance de vany and eckert 1991 de vany and walls 1996 furthermore in equilibrium distributors appropriate the lion s share of the marginal value created by their hits this occurs because hits are rare and the exhibitor s next best alternative is to show worse movies this is consistent with real world exhibition contracts which use nonlinear revenue sharing rules that give distributors higher shares of ticket revenue when revenue is high filson et al 2005 vertical integration one distributor owning the exhibitor has implications for strategies and welfare although the article emphasizes the impacts on strategies the welfare analysis is useful because it addresses a historical debate the paramount decrees of the late 1940s and early 1950s barred distributors from owning theaters in the 1980s the u s department of justice gave distributors permission to forward integrate again several did so including some of the largest ones de vany and eckert 1991 argue that the courts erred in the original decrees but to date no formal model supports or refutes their arguments in the infinite horizon model vertical integration is privately profitable but lowers industry value the combined value of the two firms that merge rises because they appropriate value from the remaining distributor but suboptimal investment occurs so the combined value of all three firms falls additional results depend on how integration affects bargaining power if the independent distributor maintains its bargaining power then the integrated distributor increases its investment and further delays releasing its hits the integrated distributor uses its hits as threats to appropriate value from the independent distributor in response the independent distributor reduces its investment however total industry investment never falls and it rises for a wide range of investment costs higher industry investment causes more hits to reach the theater and consumer surplus rises as a result integration may improve welfare in contrast if the independent distributor loses all of its bargaining power after integration then it reduces its investment to zero the integrated distributor still increases its investment but industry investment and welfare falls other strategies also change for example the integrated distributor tends to show its own new hits in preference to the independent distributor s because it does not need to delay releasing its hits to appropriate value

incentives information and organizational form we model an organization as a hierarchy of managers erected on top of a technology here consisting of a collection of plants in our framework the role of a manager is to take steps to reduce the adverse consequences of shocks that affect the plants beneath him we argue that different organizational forms give rise to different information about managers performance and therefore differ according to how effective incentives can be in encouraging a good performance in particular we show that under certain assumptions the m form multi divisional form is likely to provide better incentives than the u form unitary form because it promotes yardstick competition i e relative performance evaluation more effectively we conclude by presenting evidence that the assumptions on which this comparison rests are satisfied for chinese data

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

a technological and organisational explanation for the size distribution of firms this paper combines insights from the literature on the economics of organisation with traditional models of market structure to construct a theory of equilibrium firm size heterogeneity under the assumption of a homogenous product industry it is possible that configurations consisting entirely of small firms run by entrepreneurs with limited attention and with larger firms using managerial techniques to substitute away these limits to allow increasing returns technologies to become profitable can arise in equilibrium however there also exist equilibrium configurations with the co existence of large and small firms the efficiency properties of these respective equilibria are discussed finally the implications of an expanding market size are considered

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

optimal monetary policy and downward nominal wage rigidity in frictional labor markets empirical evidence suggests that nominal wages in the u s are downwardly rigid this paper studies the optimal long run inflation rate in a labor search and matching framework under the presence of downward nominal wage rigidity dnwr in this environment optimal monetary policy targets a positive inflation rate the annual long run inflation rate for the u s is around 2 percent positive inflation greases the wheels of the labor market by facilitating real wage adjustments and hence it eases job creation and prevents excessive increase in unemployment following recessionary shocks these findings are related to standard ramsey theory of wedge smoothing by following a positive inflation policy under sticky prices the monetary authority manages to reduce the volatility and the size of the intertemporal distortion significantly the intertemporal wedge is completely smoothed when prices are fully flexible since the optimal long run inflation rate predicted by this study is considerably higher than in otherwise neoclassical labor markets the nature of the labor market in which dnwr is studied can be relevant for policy recommendations

does competition solve the hold up problem in an environment in which heterogeneous buyers and sellers undertake ex ante investments the presence of market competition for matches provides incentives for investment but may leave inefficiencies namely hold up and coordination problems this paper shows using an explicitly non cooperative model that when matching is assortative and investments precede market competition buyers investments are constrained efficient while sellers marginally underinvest with respect to what would be constrained efficient however the overall extent of this inefficiency may be large multiple equilibria may arise one equilibrium is characterized by efficient matches but there can be additional equilibria with coordination failures

some implications of growth for organizational form and ownership structure building on previous modeling of the separation between formal and real authority in organizations the paper investigates some implications of growth for the scope of integration and the internal organization of firms it stresses the role of headquarters overload and the differential and unmeasured cost of internal and external units in terms of their use of a scarce corporate resource namely headquarters attention the paper first shows how growth or other factors leads to restructuring for example through spin offs move of units to the periphery and refocus on core competencies it then looks at the internal allocation of tasks and studies whether overload considerations may induce a firm to create profit centers and abandon a functional or unitary form u form in favor of a multidivisional form m form

entry deterrence by non horizontal merger we study when and how pure non horizontal mergers whether cross product or vertical can deter new entry organizational mergers implicitly commit firms to more aggressive price competition because heightened competition deters entry mergers can occur in equilibrium even when absent entry considerations they do not we show that in order to prevent a flood of entrants mergers arise even when a marginal merger costs incumbent firms more than does a marginal entrant

downward nominal wage flexibility real or measurement error this paper presents a new method to correct for measurement error in wage data and applies this method to address an old question how much downward wage flexibility is there in the united states we apply standard methods developed by bai and perron to identify structural breaks in time series data applying these methods to wage histories allows us to identify when each person experiences a change in nominal wages the length of the period of constant nominal wages is left unrestricted and is allowed to differ across individuals as are the size and direction of the nominal wage change we apply these methods to data from the survey of income and program participation the evidence we provide indicates that the probability of a cut in nominal wages is substantially overstated in data that are not corrected for measurement error

patents vs trade secrets knowledge licensing and spillover we develop a model of two stage cumulative research and development rd yet the contracting parties choose the closed sale whenever the interim knowledge is more valuable and leakage is sufficiently high if the extent of leakage is lower more rus choose open sales generating a nonmonotonic relationship between the strength of intellectual property rights and aggregate r d expenditures and the overall likelihood of development by either du jel d23 o32 o34

vertical integration and innovation abstract innovation is a driving force for most industries where it moreover affects many stages of the vertical chain we study the impact of vertical integration on innovation in an industry where firms need to undertake risky r d investments at both production and distribution stages vertical integration brings better coordination within the integrated firm which boosts its investment incentive at both upstream and downstream levels however it is only mutually beneficial for firms to integrate when both upstream and downstream innovations are important when innovation is irrelevant at one level firms favor instead vertical separation the analysis provides insights for the wave of mergers and r d outsourcing observed in the pharmaceutical industry and other vertically related industries