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

cooperative and noncooperative r d in duopoly with spillovers contrary to the usual assumption made in most oligopoly models relations among firms are seldom of a wholly cooperative or noncooperative type in many situations they compete in some fields while they cooperate in others an important example is the case of cooperative research efforts bringing fierce competitors together two types of agreement are observed first r d cooperation can take place at the so called precompetitive stage companies share basic information and efforts in the r d stage but remain rivals in the market place 1 a second type of agreement involves an extended collusion between partners creating common policies at the product level the usual justifications of this extension are the difficulties of protecting intellectual property the idea is then to allow partners who have achieved inventions together to also control together the processes and products which embody the results of their collaboration in order to recuperate jointly their r d investments 2 what could be expected from these types of agreement is a reduction in r d expenditures because of less wasteful duplication and a reduction of total production because of more reprinted from the american economic review 78 5 1133 1137 1988 center for operations research econometrics 1348 louvain la neuve belgium we are grateful to jean

competition risk and managerial incentives this paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers a central assumption is that there is free entry and exit in the industry which implies that changes in the nature of competition lead to changes in the equilibrium market structure the main result is that as the intensity of product market competition increases as a result of greater product substitutability or greater market size principals unambiguously provide stronger incentives to their agents to reduce costs at the same time more intense competition also leads to more volatile firm level profits consequently managers incentives are positively correlated with firm level risk consistent with empirical evidence a decrease in the cost of entering the market has the opposite effect on incentives but still induces a positive correlation between risk and incentives

unforeseen contingencies and incomplete contracts we scrutinize the conceptual framework commonly used in the incomplete contract literature this literature usually assumes that contractual incompleteness is due to the transaction costs of describing or of even foreseeing the possible states of nature in advance we argue however that such transaction costs need not interfere with optimal contracting i e transaction costs need not be relevant provided that agents can probabilistically forecast their possible future payoffs even if other aspects of the state of the nature cannot be forecast in other words all that is required for optimality is that agents be able to perform dynamic programming an assumption always invoked by the incomplete contract literature the foregoing optimality result holds very generally provided that parties can commit themselves not to renegotiate moreover we point out that renegotiation may be hard to reconcile with a framework that otherwise presumes perfect rationality however even if renegotiation is allowed the result still remains valid provided that parties are risk averse

reaching for the stars who pays for talent in innovative industries innovative firms need to hire and motivate highly talented workers this article connects the potential returns to innovation to the structure of compensation for skilled employees we show that the software firms that operate in software sectors with high potential upside gains to innovation pay more to star workers than do other firms that operate in stable markets firms operating in product domains with highly skewed positive returns pay employees more in up front starting salaries and offer higher compensation growth the large estimated effects on earnings are robust to the inclusion of a wide range of controls for worker and firm characteristics

a new approach to the economic inequality based upon the permanent income hypothesis abstract we propose a new inequality measure based upon the permanent income hypothesis tracing its historical changes in japan we compare it with some traditional inequality measures for the income distribution

decomposing interregional differentials in productivities an empirical analysis for japanese data abstract we propose a method for decomposing interregional differentials in productivities based on the lifecycle permanent income hypothesis we also conduct an empirical analysis using japanese prefectural data and examine the effectiveness of this method

a theory of firm scope the formal literature on firm boundaries has assumed that ex post conflicts are resolved through bargaining in reality parties often simply exercise their decision rights we develop a model based on shading in which the use of authority has a central role we consider two firms deciding whether to adopt a common standard nonintegrated firms may fail to coordinate if one firm loses an integrated firm can internalize the externality but puts insufficient weight on employee benefits we use our approach to understand why cisco acquired stratacom a provider of new transmission technology we also analyze delegation

the reference point approach to the theory of the firm an introduction there is a small but growing literature on the reference point approach to incomplete contracts as formulated by hart and moore the reference point approach has begun to be applied to the theory of the firm in 3 recent papers this introduction reviews the main theoretical aspects of each of these papers it then discusses the relationship between the reference point approach to the firm the transaction cost approach and the property rights approach here it is argued that the reference point approach is a step back towards ex post inefficiencies away from reliance on ex ante inefficiencies

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

surveying the economics of plural modes of organization why do firms concomitantly rely on more than one organizational arrangement to procure distribute a given input product in this paper we systematically review and discuss the extensive path undergone by the literature exploring this issue the so called plural forms we address two main questions how to explain the coexistence and often the prevalence of plural forms in many types of businesses are plural forms stable or a transitory phenomenon we describe the most prominent motivations identified in the economics and management literature that drive firms to adopt plural forms and show that their vast majority are related to the mitigation of various types of agency transaction costs we also demonstrate that most of the available pieces of empirical evidence suggest the stability of plural forms over time we conclude by demonstrating the path that has been trailed by the most recent developments

vertical integration and firm boundaries the evidence since ronald h coase s 1937 seminal paper a rich set of theories has been developed that deal with firm boundaries in vertical or input output structures in the last twenty five years empirical evidence that can shed light on those theories also has been accumulating we review the findings of empirical studies that have addressed two main interrelated questions first what types of transactions are best brought within the firm and second what are the consequences of vertical integration decisions for economic outcomes such as prices quantities investment and profits throughout we highlight areas of potential cross fertilization and promising areas for future work

annual redistribution and lifetime redistribution abstract i propose a method to evaluate the degree of income redistribution throughout a person s life time an international comparison of life time redistribution in the united states the united kingdom and japan has been attempted this comparison clearly shows the differences in the degree of redistribution in each of the countries

responding to rivals and complements how market concentration shapes generational product innovation strategy this study examines how competitive market conditions shape the responsiveness with which businesses release generational product innovations gpis following the introduction of gpis by either competitors or complementary firms gpis are substantial technical advances in the performance of products within technology regimes prior studies of innovation timing in the organizational strategy literature emphasize internally driven strategies of gpi although internally driven strategies may predominate when businesses face diffuse competition for their product lines the literature largely overlooks the point that businesses need to be increasingly responsive to external events as market concentration increases this study which examines businesses competing in the u s packaged software industry in the 1990s shows that increasing industry concentration raises the stakes surrounding market positions and leads to greater interdependence of innovation strategies in an industry including interactions both with competitors and with other players in a larger system of complementary products as concentration increases therefore organizations are less driven by historical patterns of innovation and become increasingly responsive to innovations by both types of external actors

information assets technology and organization although there is good reason to expect that the growth of information work and information technology will significantly affect the trade offs inherent in different structures for organizing work the theoretical basis for these changes remains poorly understood this paper seeks to address this gap by analyzing the incentive effects of different ownership arrangement in the spirit of the grossman hart moore ghm incomplete contracts theory of the firm a key departure from earlier approaches is the inclusion of a role for an information asset analogous to the ghm treatment of property this approach highlights the organizational significance of information ownership and information technology for instance using this framework one can determine when 1 informed workers are more likely to be owners than employees of firms 2 increased flexibility of assets will facilitate decentralization and 3 the need for centralized coordination will lead to centralized ownership the framework developed shed

contracts entrepreneurs market creation and judgement the contemporary mainstream theory of the firm in perspective this survey gives an overview of the theory of the firm as it is formulated within the contemporary mainstream of economics two groupings of theories are briefly discussed principal agent and incomplete contract models next three of the most recent contributions regarding firms are considered the reference point approach is looked at first followed by a discussion of spulber s book the theory of the firm last we consider the entrepreneurial judgement perspective

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

what makes companies pursue an open science strategy whereas recent scholarly research has provided many insights about universities engaging in commercial activities there is still little empirical evidence regarding the opposite phenomenon of companies disseminating scientific knowledge our paper aims to fill this gap and explores the motivations of firms that disclose research outcomes in a scientific format besides considering a dimension internal to the firm we focus particularly on knowledge sourcing from academic institutions and the appropriability regime we conduct an econometric analysis with firm level data from the fourth edition of the french innovation survey cis and matched scientific publications for a sample of 2512 rd performing firms from all manufacturing sectors this analysis provides evidence that firms are more likely to adopt academic principles if they need to access scientific knowledge that is considered important for their innovation development whereas the mere existence of collaborative links with academic institutions is not a strong determinant furthermore the results suggest that the inclination of firms to publish is sensitive to the level of knowledge spillovers in a sector and the effectiveness of legal appropriation instruments c 2013 elsevier b v all rights reserved

positions and rewards the allocation of resources within a science based entrepreneurial firm we study the link between resource allocation and employee publication in the open science in a quantitative case study of one science based entrepreneurial firm we bridge the literature on incentives with that on authority structures to argue that a positive relationship between rewards and productivity will be strongest for individuals in positions of scientific leadership within the firm in a novel dataset we find that prolific publishers receive greater year end bonuses and are allocated additional direct reports but this relationship only holds for individuals in scientific leadership roles these results contribute to our understanding of resource allocation processes and reward structures in science based firms

agency costs and innovation abstract stylized facts indicate that small firms are responsible for a disproportionate share of innovative research there are many possible explanations for this fact the paper seeks to understand this phenomenon as the outcome of an optimal assignment of tasks across individuals and organizations it is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes mixing hard to measure activities innovation with easy to measure activities routine is particularly costly since it will either lead to misallocation of attention across tasks or to misallocation of risk larger firms are at a comparative disadvantage in conducting highly innovative research because of the costs associated with managing a heterogeneous set of tasks it is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets both of which are hostile to innovation

on the dynamic efficiency of bertrand and cournot equilibria abstract this paper compares bertrand and cournot equilibria in a differentiated duopoly with r d research and development competition it shows that cournot competition induces more r d effort than bertrand competition however the price is lower and output is larger in bertrand than in cournot competition furthermore the bertrand equilibrium is more efficient than the cournot equilibrium if either r d productivity is low or spillovers are weak or products are very different if r d productivity is high spillovers are strong and goods are close substitutes then the bertrand equilibrium islessefficient than the cournot equilibrium journal of economic literatureclassification number l13

the history of the theory of the firm from marshall to robinson and chamberlin the source of positivism in economics a widely believed story in the folklore of the economics profession is that the theories of perfect competition and monopoly were well established from the time of marshall or perhaps pigou s economics of welfare and that the role of imperfect or monopolistic competition theory was to fill in the middle ground between these extremes it will be shown in this paper that the folklore conflicts with the historical evidence robinson and chamberlin created the theory of perfect competition in the course of inventing imperfect and monopolistic competition theory robinson and chamberlin between them were concerned with the same issues that concerned marshall the difference is that robinson and chamberlin derived their analyses from a few clear axioms while marshall sought to develop his analysis from a well informed but necessarily impressionistic description of actual business behaviour and dynamic processes along with the introduction of indifference analysis to english speaking economists by hicks and allen robinson and chamberlin gave the theory of value and distribution a complete and logically consistent axiomatic basis because their axioms relating to business motivation and behaviour were amenable to empirical verification the work of robinson and chamberlin rendered the theory of value and distribution open to a new empirical criticism it will be argued that the widespread acceptance of friedman s 195 3 positive methodological position was a necessary response to these empirical criticisms if the new axiomatic foundations of the theory of value and distribution were to be as secure as those previously provided by marshall

managerial incentives and product market competition are imperfectly competitive leibenstein 1966 claims that there may be a substantial amount of x inefficiency where x inefficiency measures the degree to which actual profits depart from the maximum of profits that could be obtained if all operations in the firm were carried out at minimal costs he offers empirical evidence from case studies showing that the welfare loss due to organizational slack is of an order of magnitude bigger than the welfare loss due to monopolistic price distortions on imperfectly competitive markets these results support the common presumption that increasing competition reduces organizational and in particular managerial slack however this early literature does not offer a theoretical explanation for the link between competition and managerial incentives in particular it ignores the fact that managerial incentives can be affected by the design of an incentive scheme in this paper i derive the optimal incentive scheme for a manager as a function of the competitiveness of the environment in which his firm operates the basic impact of increased competition is that it reduces the profits of a firm this has two effects in the model first if a firm has high costs then the reduction of profits may be sufficient to render the firm unprofitable so the probability that it has to be liquidated goes up this unambiguously induces the manager of the firm to work harder for a cost reduction in order to avoid liquidation and to keep his job second the reduction in profits may affect

cheat or perish a theory of scientific customs abstract performance incentives have become increasingly important in academia evidence suggest that they increase not only researchers effort but also their cheating we develop a principal agent framework in which a research institution principal aims to reward scientific productivity considering the social benefit of research and the remuneration costs researchers agents take into account what others are doing as a consequence the introduction of performance incentives not only leads to fraudulent behavior in the short run but may also deteriorate the scientific norm in the long run in the face of these dynamics the principal pursues two goals to increase productivity effort incentive policy and to deal with fraud anti fraud policy several factors determine the optimal mix of policies economic factors researchers cost of providing high or low effort the societal value of scientific knowledge and the societal costs of scientific misbehavior and psychological factors the evolution of norms over time an important insight of our theory is that when research institutions seek to encourage the production of high quality research they should also raise the salary for normal research to avoid misconduct

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

inventorship and authorship as attribution rights an enquiry into the economics of scientific credit abstract authorship and inventorship are attribution rights upon which individual scientists build their reputation and career social and legal norms concerning their distribution within research teams are currently criticized for failing to inform third parties on individual contributions we examine the case of teams engaged in the double disclosure of their research results through both publications and patents and model the negotiation process taking place between junior or female team members and the senior male ones we suggest that the former may give up inventorship in order to secure authorship even when entitled to the both based on a sample of 680 patent publication pairs related sets of patents and publications we show that very frequently one or more authors of a publication do not appear as inventors of a related patent this is less likely to happen for first and last authors which is in accordance both with our model and the prevailing legal norms on inventorship however the probability of exclusion from inventorship also declines with seniority and increases for women which is compatible with our model only

intrinsic motivation and optimal incentive contracts i study the role of intrinsic motivation on optimal incentive contracts agents engage in efforts to generate projects with both financial return and intrinsic value to the agent in a neutral environment where intrinsic motivation has no direct effect on the disutility of effort static contracts are unaffected by intrinsic motivation in contrast the firm s profits from an implicit contract are increasing in the degree to which the agent is intrinsically motivated showing that implicit contracts and intrinsic motivation are complements the results are further extended to consider the role of multiple implicit contracts and product market strategy

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

the firm as a communication network this paper analyzes how organizations can minimize costs of processing and communicating information communication is costly because it takes time for an agent to absorb new information sent by others agents can reduce this time by specializing in the processing of particular types of information when these returns to specialization outweigh costs of communication it is efficient for several agents to collaborate within a firm it is shown that efficient networks involve centralization that individuals delegate tasks to subordinates only if they are overloaded and that the number of transits to the top tends to be equalized across individual information items

competition and incentives with motivated agents a unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission as opposed to profit as an organizational goal such mission oriented organizations are frequently staffed by motivated agents who subscribe to the mission this paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency matching economizes on the need for high powered incentives it can also however entrench bureaucratic conservatism and resistance to innovations the framework developed in this paper is applied to school competition incentives in the public sector and in private nonprofits and the interdependence of incentives and productivity between the private for profit sector and the mission oriented sector through occupational choice jel d23 d73 h41 l31 the late twentieth century witnessed a historic high in the march of market capitalism with unbridled optimism in the role of the profit motive in promoting welfare in the production of private goods moreover this generated a broad consensus on the optimal organization of private good production through privately owned competitive firms when it comes to the provision of collective goods no such consensus has emerged debates about the relative merits of public and private provision still dominate this paper suggests a contracting approach to the provision of collective goods it focuses on two key issues how to structure incentives and the role of competition between providers at its heart is the idea that organizations that provide collective goods cohere around a mission 2 thus production of collective goods can be viewed as mission oriented

product differentiation process r d and the nature of market competition abstract we investigate the relationship between process and product rd ii bertrand firms have a stronger incentive for product rd and iii cooperation in product r d promotes both types of r d relative to competition whereas cooperation in both types of r d discourages r d relative to cooperation in just product r d

optimal r d levels when firm j benefits from firm i s inventive activity abstract we amend the static model of industry structure in dasgupta and stiglitz to include external benefits from a firm s r d now the market can be seen to underinvest in r d relative to the social optimum the work of mansfield suggests that such external benefits are pervasive

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

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

individual preferences organization and competition in a model of r d incentive provision abstract understanding the organization of rd 2 knowledge is not perfectly appropriable 3 scientists are responsive to both monetary and non monetary incentives and 4 firms compete on the product market we show that both knowledge spillovers and market competition affect the incentives given to scientists and these effects interact first high knowledge spillovers lead firms to soften incentives when product market competition is high and to strengthen incentives when competition is low second the relationship between the intensity of competition and the power of incentives is u shaped with the exact shape depending on the degree of knowledge spillovers we also show that the performance contingent pay for both applied and basic research increases with the non pecuniary benefits that scientists obtain from research while the fixed component decreases we relate our findings to the existing empirical evidence and also discuss their implications for management and public policy

endogenous spillovers and the performance of research joint ventures we present a model of r d with endogenous spillovers and demonstrate that noncooperation can produce maximal spillovers the only other noncooperative outcome is minimal spillovers when noncooperation achieves maximal spillovers so does an rjv whereas minimal noncooperative spillovers imply partial but not necessarily maximal spillovers by an rjv partial rjv spillovers are chosen for anti competitive reasons and an rjv may also close a lab for anti competitive reasons the possibility of anti competitive outcomes is precluded in the existing literature on rjvs which focuses on symmetric outcomes our model predicts when anti competitive behaviour by an rjv arises

product market competition and organizational slack under profit target contracts in a framework a la martin 1993 we introduce a common component in the managers private information in order to address three related questions what is the impact of contracts that reward managers on the basis of realized profits on firms productive and allocative efficiency relative to cost target contracts how do these contracts shape the relationship between competition and organizational slack can we then explain the existing evidence of an inverted u shaped relationship between competition and cost reducing activities as documented in aghion et al aghion p bloom n blundell r griffith r howitt p competition and innovation an inverted u relationship the quarterly journal of economics 120 pp 701 728 2005 we show that profit target contracts introduce a horizontal contractual externality between the competing firms that mitigates organizational slack and improves upon productive efficiency relative to cost plus mechanisms moreover when executive compensations are conditioned on profits an inverted u shaped relationship between product market competition and managerial effort obtains finally we also show that when contractual instruments are endogenous i e when shareholders can choose between profit and cost target rules the equilibrium with profit target contracts always exists and is the only one that survives to standard refinements