dynamic market models in industrial organization abstract this paper surveys empirical work done on dynamic models of market performance these fall into one of two categories structural models which model how market structure and performance change in response to entry and reduced form models which describe change regardless of how it is brought about a typical example of each type of model is chosen from the literature and simulations are used to draw out the implications of the estimated coefficients both models depict the competitive process in the us economy as being extremely slow

entry in greek manufacturing industry athens vs the rest of greece the paper reports an attempt to estimate the determinants of entry in greek manufacturing industry in the 1984 87 period and to identify the differences between locatio nal entry preferences entry in athens is found to be hesitant with respect to factors such as profitability and increased competition conversely entry in the rest of the country is strongly related to expected profits and safe markets negatively affected by relative labour costs and indifferent to international competition threats the healthier approach of regional entry is enhancing regional development prospects and partly justifies the strict regional policies of the 1980s

new firm startups technology and macroeconomic fluctuations new firm startup activity is examined within a framework pooling a cross section of 117 industries over six time periods between 1976 and 1986 a model is introduced relating startup activity both to elements of the business cycle in particular the macroeconomic growth rate the cost of capital and the unemployment rate and to industry specific characteristics especially the technological conditions underlying the industry the pooled cross section regression results suggest that macroeconomic fluctuations as well as industry specific elements contribute to startup activity while new firm startups respond positively to macroeconomic growth they are promoted by a low cost of capital and high unemployment rate a somewhat surprising result is that new firm startups are not apparently deterred in capital intensive industries and where r d expenditures play an important role the empirical results suggest that new firms may be able to overcome their inherent size and experience disadvantages in such markets through exploiting university research and pursuing innovative activity

diversification market growth and concentration in u s manufacturing in this paper i report the results of an empirical investigation of the sources of expansion in secondary industries by diversified firms and the influence of that expansion on changes in seller concentration during the period from 1972 to 1977 interest in the issue arises from long lived public policy arguments over the effects of conglomerate diversification and the expected results of restrictions on conglomerate mergers despite the interest data weaknesses have restricted both the number of statistical studies of the issue and their results i use census data to test several distinct hypotheses generated by past studies the results indicate that diversification is directed toward industries of high growth and profits and they also provide support for a view first advanced by charles berry that diversification into an industry is associated with declining concentration in industries of initially

tangible and intangible sunk costs and the entry and exit of firms in a small open economy the case of austria the paper provides evidence on the role of sunk costs as mobility barriers an empirical study of the austrian manufacturing industry explicitly considers sunk costs related to investment in dedicated intangible assets the results confirm the relevance of sunk costs as mobility barriers their symmetry with respect to entry and exit and show that the influence of sunk costs is robust to aggregation

an analysis of the optimal provision of public infrastructure a computational model using mexican data abstract we construct a intertemporal general equilibrium model and use it to examine infrastructure effects on mexican national income we consider three types of infrastructure electricity transportation and communications we then estimate production functions for the 16 major sectors of the economy in which sectoral output depends upon inputs of capital and labor as well as the stocks of the three types of infrastructure we then use these estimates to analyze the optimal level of government spending on the different types of infrastructure despite the fact that the estimated output elasticities with respect to public infrastructure are relatively high increased expenditure on infrastructure has rapidly decreasing benefits some benefits could be achieved by modest increases in capital expenditures although at the cost of significantly higher inflation and real interest rates indeed the increase in real interest rates causes the benefits of enhance infrastructure to be greatly reduced

general equilibrium effects of investment incentives in mexico mexico has experimented with several tax instruments designed to promote private capital formation among such initiatives were general and industry specific tax credits employment tax credits and corporate tax credits the authors examine relative efficacy of such instruments using a dynamic computable general equilibrium model they carry out model simulations using three equal yield investment incentive scenarios increases in investment tax credits increases in employment tax credits and an equivalent reduction in the corporate tax rate the authors present outlines of the tax policy environment with model details and they highlight alternate tax incentives regimes conclusions and summary results are provided by the authors

entry into regulated monopoly markets the development of a competitive fringe in the local telephone industry abstract incumbent firms operating in today s local telephone industry are beginning to face competition from new entrants using the dominant firm competitive fringe framework and a recently constructed panel data set of local telephone markets this paper provides an empirical analysis of the competitive transition underway in the u s local telephone industry of particular interest is the differential impact of economic regulation on the development of fringe competition in flocal telephone markets empirical results reveal that local telephone markets with price cap regulation have witnessed less net fringe entry and subsequently contain smaller competitive fringes during the time period studied these findings imply that the widespread adoption of price cap regulation by state public utility commissions has contributed to the slow development of local telephone competition to reconcile this surprising conclusion a political economy explanation that details how state regulators have benefited from

prices technology and farm size in this paper we construct and empirically test a theory of the agricultural firm which explains the long term growth in farm size in the united states typically the u s farm unit is a family enterprise consequently the ratio of the opportunity cost of farm labor to the price of machinery services determines the size of the farm operation by influencing the machine labor ratio applying the model to u s data we explain virtually all of the growth in the machine labor ratio and in farm size over the 1930 70 period by changes in relative factor prices without reference to technological change or economies of scale

optimal growth when tastes are inherited we address the issue of optimal growth when standard of living aspirations are transmitted from one generation to the next we derive the condition for the optimal solution to be stable in the saddle point sense and show that this optimal solution may display damped oscillations even when the planner does not discount the utility of future generations golden rule case the decentralization of the optimal solution aims at correcting the inter generational externality by use of an investment subsidy and allows to avoid socially damaging rushes on consumption in expansion periods it also allows to stabilize output in the case of competitive economies displaying endogenous fluctuations

oil prices and rural migration the dutch disease goes south abstract we construct a two period general equilibrium model to evaluate policies affecting agricultural migration and exports the model is applied to mexico for the period 1986 1987 to obtain certain qualitative policy conclusions related to the dutch disease brought about by oil price increases dutch disease phenomena can be brought about both as the result of real exchange rate changes as well as price changes caused by migration out of agriculture in the short run it may be possible to use fiscal policy such as value added subsidies to agriculture to at least partially negate the effects of an oil price increase on agricultural exports jel f31 f41

the relationship between firm growth size and age estimates for 100 manufacturing industries this study uses a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics it finds that firm growth the variability of firm growth and the probability that a firm will fail decrease with firm age it also finds that firm growth decreases at a diminishing rate with firm size even after controlling for the exit of slow growing firms from the sample gibrat s law therefore fails although the severity of the failure decreases with firm size copyright 1987 by blackwell publishing ltd

bridging behavioral and economic theories of decline organizational inertia strategic competition and chronic failure this paper is another plea for bridging behavioral and economic approaches to the study of competition in markets and strategy making by firms the arguments focus on a specific case in point the behavioral theory of organizational decline and the economic modeling of immediate exit the arguments come in three steps first the literature on organizational decline is reviewed by organizing a framework that summarizes arguments from varying economic and organizational perspectives that have for the most part developed independently observations from empirical and theoretical studies are combined in order to investigate the causes conditions courses and consequences of organizational downturn second a theoretical argument is developed that explains voluntary exit and chronic failure by introducing a proxy of organizational inertia in a model of strategic cournot duopoly the key assumptions which have a behavioral flavour that seemingly contradicts orthodox economics are grounded in the theoretical and empirical literatures the results of the model support the claim that pure profit maximizing behavior may be at the expense of organizational survival d aveni 1990 p 135 third by formulating two hypotheses and presenting tentative evidence from the chemical industry the paper hopes to convincingly argue that such integrative models lead to empirical testing of interesting hypotheses a key finding here is that inefficient firms may outlast their efficient rivals cf d aveni 1989a

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

intertemporal output and employment effects of public infrastructure capital evidence from 12 oecd economies this paper utilises an intertemporal optimisation framework to study the effects of public infrastructure capital on output supply and input demands in 12 oecd countries we find that in all 12 countries i public capital has positive long run effects on both output supply and input demands ii its mean short run rates of return are fairly low while the corresponding long run rates are much higher but declining over time these findings underscore important under investment gaps in infrastructure during the 1970s and 1980s these gaps however narrowed down significantly in a few cases completely by the early 1990s

optimal growth with decreasing marginal impatience abstract this paper analyses the long run dynamics of a continuous time infinite horizon optimal growth model with identical households where the households rate of time preference is endogenously determined however unlike the existing literature we assume that households have decreasing marginal impatience i e the instantaneous discount rate is negatively related to the current consumption with this assumption we analyse the stability and uniqueness of the long run equilibrium we show that contrary to the general belief a negative relationship between the instantaneous discount rate and the household s current consumption does not necessarily result in instability of the dynamic system however even a stable system may be characterized by multiple equilibria so that the initial condition becomes important in determining the long run behaviour of the economy we derive a set of sufficient conditions for stability and uniqueness in this context

perceived inflation under loss aversion building on prospect theory we apply the concept of loss aversion to the formation of inflation perceptions and test empirically for nonlinearities in the inflation perceptions relation for a panel of 10 euro area countries specifically under the assumption of loss aversion inflation changes above a certain reference rate will be perceived more strongly rejecting rationality of inflation perceptions in general under symmetric loss and in a majority of cases under flexible loss functions panel smooth transition models give evidence of nonlinearities in the inflation perceptions relation regarding both actual inflation and time this result is confirmed by dynamic fixed effects estimates where the slope of the estimated value function is significantly steeper in the loss region and the implied average reference inflation rate is found close to 2

strategy structure and performance of korean business groups a transactions cost approach the authors use the transactions cost approach to analyze the diversification strategy and the resulting structure chosen by korean business groups to overcome market imperfections prevalent in developing countries business groups that have multidivisional struc ture are thought to show superior economic performance because such s tructure reduces transactions costs arising from organizational failure also major korean business groups have a relational structure showing both vertical integration and the characteristics of the conglomerate the authors modify the model of r e caves and m uekusa 1976 used for japan to obtain the empirical result tha t group affiliated firms show superior economic performance copyright 1988 by blackwell publishing ltd

the role of infrastructure in mexican economic reform this article estimates the relationship between the provision of public infrastructure and private output in sixteen sectors in mexico the sector specific cost functions depend on wages the cost of capital and the nominal values of the stocks of three types of infrastructure electricity transport and communications the article concludes that infrastructure in electricity and communications generally reduces the cost of sectoral production but transportation infrastructure tends to increase costs of sectoral production it appears that mexican public expenditure on electricity and communications has enhanced the productivity of private production but expenditure on transport may actually have had a detrimental effect on private output in addition although in general labor and infrastructure are substitutes in the case of electricity and communications infrastructure capital and infrastructure are complements in the case of transport infrastructure these conclusions are reversed copyright 1995 by oxford university press

habits and time preference this paper proposes a utility function incorporating both habit formation and an endogenous rate of time preference in a manner consistent with the intuition of irving fisher regarding the influence of past consumption on impatience it is shown that the ne w specification is tractable and generates new predictions in the cont ext of three model economies 1 a closed economy with heterogeneous agents 2 a small open economy with one traded good and one nontra ded good and 3 a small open economy with a traded good and domestic money copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

entry and exit on the competitive fringe microeconomic theories of industry evolution reserve key roles for the entry and exit of firms competitive models of industry supply often assume that individual firms have ushaped long run average cost curves in consequence an industry s output adjustment in movement from one long run equilibrium to another is entirely accomplished through the entry and exit of firms rather than through changes in long run equilibrium output of individual firms in empirical applications the speed of movement to new equilibrium levels of output and price measured by the time it takes for profits to return to competitive levels following a demand shock clearly depends upon the ease of entry and exit however the simplest competitive models have a clear theoretical weakness abundant evidence against u shaped long run average cost curves precludes a simple identification of entry with industry expansion and exit with industry contraction expansion of industry supply can be met either by incumbents or entrants and we have little empirical evidence of the division entry conditions are also a staple of oligopoly and monopoly models potential entry constrains the pricing options open to industry leaders and actual entry of new firms and new products erodes at varying rates the market power of incumbent firms if actual entry responds rapidly to profit opportunities then the persistent exercise of monopoly power will be rare however analyses of monopoly and oligopoly models typically approach entry indirectly by inferring that persistent profit differentials reflect high barriers to entry there are few direct tests of the effects of such barriers on actual entry despite their importance very few empirical studies of entry and exit exist severe data limitations restrict both the number of studies and the scope of extant analyses the research reported in this paper provides measures of entry and exit in 46 food manufacturing industries during the 1976 82 period measures of incidence the number of firms as well as extent the size of firms are provided the analysis also distinguishes between diversified firms and specialist producers entry and exit rates vary considerably across industries and the paper reports the results of statistical analyses that account for industry differences in entry and exit rates by specialist firms

measuring consumption smoothing in cex data this paper proposes and implements a new method of measuring the degree of consumption smoothing using data from the consumer expenditure survey the structure of this survey is such that estimators previously used in the literature are inconsistent simply because income is measured annually and consumption is measured quarterly we impose an ar 1 structure on the income process to obtain a proxy for quarterly income through a projection on annual income by construction this proxy gives rise to a measurement error which is orthogonal to the proxy itself as opposed to the unobserved regressor leading to a consistent estimator we contrast our estimates with the output of two estimators used in the literature we show that while the flrst ols estimator tends to overstate the degree of risk sharing the second iv estimator grossly understates it

loss aversion in aggregate macroeconomic time series abstract prospect theory has been the focus of increasing attention in many fields of economics however it has scarcely been addressed in macroeconomic growth models neither on theoretical nor on empirical grounds in this paper we use prospect theory in a stochastic optimal growth model thereafter the focus lies on linking the euler equation obtained from a prospect theory growth model of this kind to real macroeconomic data we will use generalized method of moments gmm estimation to test the implications of such a non linear prospect utility euler equation our results indicate that loss aversion can be traced in aggregate macroeconomic time series

entry industry growth and the microdynamics of industry supply entry is widely discussed but rarely subjected to empirical study this study develops a competitive theory of entry with primary focus on the relationship between entry and industry growth the main ingredients are adjustment costs to firms already in the industry and the distribution of fixed entry cost to potential entrants the theory suggests sufficient conditions under which the entry rate is an increasing convex function of the industry growth rate a regression model correcting for severe heteroscedasticity is applied to data from swedish manufacturing industries the results are consistent with the theoretical prediction for growth and other key variables expected to influence entry significantly

a market power based model of business groups we propose an model of vertically and horizontally integrated business groups that allows the number and size of each group to be determined endogenously we find that more than one configuration of groups can arise in equilibrium several different types of business groups can occur each of which are consistent with profit maximization and are stable we suggest that the strongly integrated groups arising in the model characterize the chaebol found in south korea whereas the less integrated groups describe those found in taiwan

the m form industrial groups american style abstract this paper reviews the evolution of industrial groups in the united states and then briefly compares their historical development with that of groups in other advanced market economies the central role of the shift from attempting to achieve market control through contractual cooperation to achieve it through administrative efficiency is underlined such a shift has occurred much earlier in the united states than in other economies

consumption paths under prospect utility in an optimal growth model this paper studies the cass koopmans ramsey model of optimal economic growth in the presence of loss aversion and habit formation the representative agent s preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of substitution cies case and kahneman and tversky s prospect utility we find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model in particular consumption smoothing is more pronounced we also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital

ramsey meets laibson in the neoclassical growth model the neoclassical growth model is modified to include a variable rate of time preference with no commitment ability and log utility the equilibrium features a constant effective rate of time preference and is observationally equivalent to the standard model the extended framework yields testable linkages between the extent of commitment ability and the rates of saving and growth the model also has welfare implications including the optimal design of institutions that facilitate household commitments steady state results are obtained for general concave utility functions and some properties of the transitional dynamics are characterized for isoelastic utility

the fed s monetary policy rule and u s inflation the case of asymmetric preferences abstract this paper investigates the empirical relevance of a new framework for monetary policy analysis in which the decision makers are allowed but not required to weight differently positive and negative deviations of inflation and output from the target values the estimates of the central bank s euler equation indicate that the preferences of the fed had been asymmetric only before 1979 with the interest rate response to output contractions being larger than the response to output expansions of the same magnitude we show that this asymmetry on output implied an average inflation bias around 1 5 while the implicit inflation target also declined the asymmetric preferences induced inflation bias appears to account for a sizable fraction of the historical decline in the inflation mean

the determinants of exit in an open economy in this paper the determinants of exit are investigated for the manufacturing sector of the united states economy which has been subjected to growing international influences the analysis uses united states cross sectional data the results of the exit equation suggest that low profitability declining industry growth and displacement of incumbents by entrants foster exit international influences are also seen to have an impact on u s manufacturing exit specifically imports into an industry have a small effect on exit and protection has little influence in stemming exit

the life cycle of the u s tire industry 1 introduction a recent literature has emerged focusing on industry evolution or the dynamic patterns that industries and firms follow as they systematically evolve over time this literature is important because of the insights provided about how industries change why they change and the consequences of industrial change the year 1982 saw three fundamental contributions made to the research on the evolution of industry boyan jovanovic published the first formal model of industry evolution richard nelson and sidney winter presented their influential book on the causes and effects of this phenomenon and michael gort and steven klepper published their careful analysis of the stages of the product life cycle knowledge concerning industry dynamics and industry evolution has expanded since then despite this progress in the field of industry evolution considerable gaps remain for example we lack an adequate empirical understanding of the evolutionary process at the single industry level from the early to the late stages of its life cycle shakeouts have been identified in the literature as an integral component of this evolutionary process the sudden disappearance of large numbers of firms have been documented across a broad spectrum of industries such as steel airline carriers financial intermediaries automobiles and tires an important strand in the literature argues that the catalyst for these shakeouts is the introduction of a new dominant innovation confronted by a new technology introduced by a competitor the inability of other firms to adopt this new dominant technology presumably forces them out of the market jovanovic and macdonald 1994 made a pioneering and parsimonious contribution in this field of research by explaining patterns of number of firms output and prices of the u s tire industry despite the importance of their contribution we argue that their model does not adequately describe the key historic developments that have taken place in this or many other industries that faced a shakeout of producers 2 the domain of relevance of the jovanovic macdonald model is limited it assumes that one innovation followed by just one refinement is responsible for the nonmonotonicity in firm numbers this implies that the model is applicable only for those industries having experienced just two technologies in their entire history an initial low tech and a subsequent high tech phase most industries including the automobile tire industry that was the testing ground of jovanovic and macdonald have an ongoing history of significant improvements in product quality and productivity it seldom occurs that one innovation is dominant this is certainly true for the tire industry nelson 1987 in his study on the u s tire industry observed that there was no single technical breakthrough that unlocked the industry s potential for highspeed production nor was any individual or firm of overriding importance the advent of mass production was a cumulative process resulting from a vast number of successive small changes pp 331 2 italics added almost half a century ago reynolds 1938 p 463 described a similar process the great improvement in tire quality during the past 30 years is undoubtedly due to constant repetition of the cycle of invention and imitation we take a different approach than jovanovic and macdonald and explain the nonmonitonicity in firm numbers as resulting from gradual unit cost reduction over time leading to declining profit margins in the present paper we relate this cumulative process to the concept of learning by doing we will test the model using data of the american tire industry we do this to facilitate the comparison between our model and that of jovanovic and macdonald and because this industry is one of the few for which data are available for a long time period the process of learning by doing leading to decreasing marginal costs over time has an important impact on the number of firms in the industry