Showing papers in "Social Science Research Network in 1990"

Institutions, Institutional Change, and Economic Performance

Abstract: Examines the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time. Institutions are separate from organizations, which are assemblages of people directed to strategically operating within institutional constraints. Institutions affect the economy by influencing, together with technology, transaction and production costs. They do this by reducing uncertainty in human interaction, albeit not always efficiently. Entrepreneurs accomplish incremental changes in institutions by perceiving opportunities to do better through altering the institutional framework of political and economic organizations. Importantly, the ability to perceive these opportunities depends on both the completeness of information and the mental constructs used to process that information. Thus, institutions and entrepreneurs stand in a symbiotic relationship where each gives feedback to the other. Neoclassical economics suggests that inefficient institutions ought to be rapidly replaced. This symbiotic relationship helps explain why this theoretical consequence is often not observed: while this relationship allows growth, it also allows inefficient institutions to persist. The author identifies changes in relative prices and prevailing ideas as the source of institutional alterations. Transaction costs, however, may keep relative price changes from being fully exploited. Transaction costs are influenced by institutions and institutional development is accordingly path-dependent. (CAR)

Patent Statistics as Economic Indicators: A Survey

Abstract: This survey reviews the growing use of patent data in economic analysis. After describing some of the main characteristics of patents and patent data, it focuses on the use of patents as an indicator of technological change. Cross-sectional and time-series studies of the relationship of patents to R&D expenditures are reviewed, as well as scattered estimates of the distribution of patent values and the value of patent rights, the latter being based on recent analyses of European patent renewal data. Time-series trends of patents granted in the U.S. are examined and their decline in the 1970s is found to be an artifact of the budget stringencies at the Patent Office. The longer run downward trend in patents per R&D dollar is interpreted not as an indication of diminishing returns but rather as a reflection of the changing meaning of such data over time. The conclusion is reached that, in spite of many difficulties and reservations, patent data remain a unique resource for the study of technical change.

Studying Information Technology in Organizations: Research Approaches and Assumptions

Abstract: We examined 155 behavioral information systems research articles published from 1983-1988and found that while this research is not rooted in a single overarching theoretical perspective itdoes exhibit a single set of philosophical assumptions about the nature of valid evidence andthe phenomena of interest to information systems researchers. We argue in this paper that thesephilosophical assumptions draw on the natural science tradition, and hence may not always beappropriate for inquiry into the relationships between information technology and people or organizations. In particular, we suggest that the development and use of information technologywithin organizations is inherently processual and contextual, and that these characteristics are notalways adequately captured by the philosophical assumptions prevalent in information systemsresearch. Positing social process as central to information systems phenomena asserts theimportance of studying the ongoing interactions among people, information technology andorganizations, as these are situated historically and contextually.We argue in this paper that the dominant research perspective in information systems research isnot well-equipped to deal with situated interactions over time, and propose additional researchphilosophies to augment the one currently favored by behavioral information systemsresearchers. We outline the features of such additional research perspectives, the interpretive andthe critical, providing empirical examples to illustrate how and when they may be useful. Weconclude that multiple research perspectives can usefully be employed within the informationsystems community to enrich understanding of behavioral information systems phenomena.

The Federal Funds Rate and the Channels of Monetary Transnission

Abstract: First, we show that the interest rate on Federal funds is extremely informative about future movements of real macroeconomic variables, more so than monetary aggregates or other interest rates. Next, we argue that the reason for this forecasting is that the funds rate sensitively records shocks to the supply of (not the demand for) bank reserves, i.e. the funds rate is a good indicator of monetary policy actions. Finally, using innovations to the fuels rate as a measure of changes in monetary policy, we present evidence consistent with the view that monetary policy works at least in part through "credit" (that is, bank loans) as well as through "money" (that is, bank deposits) - even though bank loans fail to Granger-cause real variables.

Increasing Returns and Economic Geography

Abstract: This paper develops a two-region, two-sector general equilibriun model of location. The location of agricultural production is fixed, but ionopolistcally competitive manufacturing finns choose their location to maximize profits. If transportation costs are high, returns to scale weak, and the share of spending on manufactured goods low, the incentive to produce close to the market leads to an equal division of manufacturing between the regions. With lower transport costs, stronger scale economies, or a higher manufacturing share, circular causation sets in: the more manufacturing is located in one region, the larger that region's share of demand, and this provides an incentive to locate still more manufacturing there. Thus when the parameters of the economy lie even slightly on one side of a critical "phase boundary", all manufacturing production ends up concentrated in only one region.

Irreversibility, Uncertainty, and Investment

Abstract: Most investment expenditures have two important characteristics: First, they are largely irreversible; the firm cannot disinvest, so the expenditures are sunk costs. Second, they can be delayed, allowing the firm to wait for new information about prices, costs, and other market conditions before committing resources. An emerging literature has shown that this has important implications for investment decisions, and for the determinants of investment spending. Irreversible investment is especially sensitive to risk, whether with respect to future cash flows, interest rates, or the ultimate cost of the investment. Thus if a policy goal is to stimulate investment, stability and credibility may be more important than tax incentives or interest rates. This paper presents some simple models of irreversible investment, and shows how optimal investment rules and the valuation of projects and firms can be obtained from contingent claims analysis, or alternatively from dynamic programming. It demonstrates some strengths and limitations of the methodology, and shows how the resulting investment rules depend on various parameters that come from the market environment. It also reviews a number of results and insights that have appeared in the literature recently, and discusses possible policy implications.

Some Empirical Aspects of Entrepreneurship

Abstract: About 4.2 million men and women operate businesses on a full-time basis. Comprising more than a tenth of all workers, they run most of our nation’s firms and employ about a tenth of all wage workers. The fraction of the labor force that is self-employed has increased since the mid-1970s after a long period of decline.1 This paper examines the process of selection into self-employment over the life cycle and the determinants of self-employment earnings using data from the National Longitudinal Survey of Young Men (NLS) for 1966–1981 and the Current Population Surveys for 1968–1987.

Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice

Abstract: How is risk-taking affected by prior gains and losses? While normative theory implores decision makers to only consider incremental outcomes, real decision makers are influenced by prior outcomes. We first consider how prior outcomes are combined with the potential payoffs offered by current choices. We propose an editing rule to describe how decision makers frame such problems. We also present data from real money experiments supporting a "house money effect" (increased risk seeking in the presence of a prior gain) and "break-even effects" (in the presence of prior losses, outcomes which offer a chance to break even are especially attractive).

The Allocation of Talent: Implications for Growth

Abstract: A country's most talented people typically organize production by others, so they can spread their ability advantage over a larger scale. When they start firms, they innovate and foster growth, but when they become rent seekers, they only redistribute wealth and reduce growth. Occupational choice depends on returns to ability and to scale in each sector, on market size, and on compensation contracts. In most countries, rent seeking rewards talent more than entrepreneurship does, leading to stagnation. Our evidence shows that countries with a higher proportion of engineering college majors grow faster; whereas countries with a higher proportion of law concentrators grow slower.

Human Capital, Fertility, and Economic Growth

Abstract: Our model of growth departs from both the Malthusian and neoclassical approaches by including investments in human capital We assume, crucially, that rates of return on human capital investments rise, rather than, decline, as the stock of human capital increases, until the stock becomes large This arises because the education sector uses human capital note intensively than either the capital producing sector of the goods producing sector This produces multiple steady scares: an undeveloped steady stare with little human capital, low rates of return on human capital investments and high fertility, and a developed steady stats with higher rates of return a large, and, perhaps, growing stock of human capital and low fertility Multiple steady states mean that history and luck are critical determinants of a country's growth experience

Asset Prices Under Habit Formation and Catching Up with the Joneses

Abstract: This paper introduces a utility function that nests three classes of utility functions: (1) time-separable utility functions; (2) "catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and (3) utility functions that display habit formation. Closed-form solutions for equilibrium asset prices are derived under the assumption that consumption growth is i.i.d. The equity premia under catching up with the Joneses and under habit formation are, for some parameter values, as large as the historically observed equity premium in the United States.

Industrial Market Structure and Economic Performance

Abstract: Provides a systematic presentation of the economic field of industrial organization, which is concerned with how productive activities are brought into harmony with the demand for goods and services through an organizing mechanism, such as a free market, and how variations and imperfections in the organizing mechanism affect the successful satisfying of an economy's wants. Of the three market mechanisms (tradition, central planning, and free markets), the field of industrial organization deals primarily with the market system approach. This book primarily emphasizes the manufacturing and mineral extraction sectors of industrialized economies, with less discussion of wholesale and retail distribution, services, transportation, and public utilities. Beginning with a discussion of the welfare economics of competition and monopoly, the structure of industries in the U.S. and abroad and their determinants are described, including motives for mergers and their effects. Extended analysis of pricing, product policy, and technological innovation then follows. Antitrust, price fixing, related restraints, structural monopolies, regulation, and price discrimination are examined, as are the complex policies governing pricing relationships between vertically linked firms. The role of advertising in product differentiation and the roles of market structure and product variety are identified. Innovation, patents, and their relation to market structure are explored. Overall, this analysis seeks to identify attributes or variables that influence economic performance and to build theories about the links between these attributes and end performance. (TNM)

Entrepreneur Human Capital Inputs and Small Business Longevity

Abstract: Investigates small business longevity and financial capital structure using owner human capital measures and demographic traits as explanatory variables, including education level achieved, family background, and age of owner at business start. Data were obtained from a nationwide random sample of 4,429 non-minority males who started businesses between 1976 and 1982, drawn from the U.S. 1982 Characteristics of Business Owners (CBO) survey. Those firms still in operation in 1986 were identified. Results demonstrate that educational level is the most significant human capital variable for identifying business continuance. Also, age of owner was correlated to a lessening of owner effort--therefore, the older the owner is at startup (55 and older) the less likely a firm is to remain in operation. In addition, owners that purchased existing firms are more likely to remain in business than those that started a new venture. Further, owner educational background is a major indicator of the financial capital structure of new firms. Nearly all of the businesses analyzed received no equity capital from organized financial markets, but did have access to debt capital, and those with higher educational level received larger bank loans. Dependence on debt capital, from commercial banks or family and friends, for startup financing is not an accurate gauge of high failure risk. The importance of human versus financial capital as a factor in firm continuance remains unclear. (SFL)

Public Finance in Models of Economic Growth

Abstract: The recent literature on endogenous economic growth allows for effects of fiscal policy on long-term growth. If the social rate of return on investment exceeds the private return, then tax policies that encourage investment can raise the growth rate and levels of utility. An excess of the social return over the private return can reflect learning-by-doing with spillover effects, the financing of government consumption purchases with an income tax, and monopoly pricing of new types of capital goods. Tax incentives for investment are not called for if the private rate of return on investment equals the social return. This situation applies in growth models if the accumulation of a broad concept of capital does not entail diminishing returns, or if technological progress appears as an expanding variety of consumer products. In growth models that incorporate public services, the optimal tax policy hinges on the characteristics of the services. If the public services are publicly-provided private goods, which are rival and excludable, or publiclyprovided public goods, which are non-rival and non-excludable, then lump-sum taxation is superior to income taxation. Many types of public goods are subject to congestion, and are therefore rival but to some extent nonexcludable. In these cases, income taxation works approximately as a user fee and can therefore be superior to lump-sum taxation. In particular, the incentives for investment and growth are too high if taxes are lump sum. We argue that the congestion model applies to a wide array of public expenditures, including transportation facilities, public utilities, courts, and possibly national defense and police.

Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements

Abstract: Trade on international financial markets allows people to insure country-specific risk and smooth consumption intertemporally. Equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near 1 and excessive volatility of investment. We incorporate nontraded goods in the model and find that the implications for aggregate consumption, investment, and the trade balance are consistent with business-cycle properties of industrialized countries. However, the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level. Taste shocks produce price - quantity relationships more consistent with the data. (JEL E30, F40)

Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States

Abstract: This paper estimates the effects of school quality - - measured by the pupil-teacher ratio, the average term length, and the relative pay of teachers -- on the rate of return to education for men born between 1920 and 1949. Using earnings data from the 1980 Census, we find that men who were educated in states with higher quality schools have a higher return to additional years of schooling, holding constant their current state of residence, their state of birth, the average return to education in the region where they currently reside, and other factors. A decrease in the pupil-teacher ratio from 30 to 25, for example, is associated with a 0.4 percentage point increase in the rate of return to education. The estimated relationship between the return to education and measures of school quality is similar for blacks and whites. Since improvements in school quality for black students were mainly driven by political and judicial pressures, we argue that the evidence for blacks reinforces a causal interpretation of the link between school quality and earnings. We also find that returns to schooling are higher for students educated in states with a higher fraction of female teachers, and in states with higher average teacher education. Holding constant school quality measures, however, we find no evidence that parental income or education affects state-level rates of return.

Fiscal Paradise: Foreign Tax Havens and American Business

Abstract: The offshore tax haven affiliates of American corporations account for more than a quarter of US foreign investment, an nearly a third of the foreign profits of US firms. This paper analyzes the origins of this tax haven activity and its implications for the US and foreign governments. Based on the behavior of US fins in 1982, it appears that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens. We calculate from this behavior that the tax rate that maximizes tax revenue for a typical haven is around 6%. The revenue implications for the US are more complicated, since tax havens may ultimately enhance the ability of the US government to tax the foreign earnings of American companies.

Why Investors Value Multinationality

Abstract: We examine the value of multinationality to investors as reflected in firms' q ratios. The positive impact of research and development and advertising spending on a firm's q is enhanced by multinationality, but multinationality itself has no significant impact. This supports the internalization theory's prediction that intangible assets are necessary to justify direct foreign investment and, thus, a recent strand of trade literature that assumes multinational firms have intangible assets with public good properties. Our results do not support the hypothesis that investors value multinational firms as a means of diversifying their portfolios internationally.

A Model of Growth Through Creative Destruction

Abstract: This paper develops a model based on Schumpeter's process of creative destruction. It departs from existing models of endogenous growth in emphasizing obsolescence of old technologies induced by the accumulation of knowledge and the resulting process or industrial innovations. This has both positive and normative implications for growth. In positive terms, the prospect of a high level of research in the future can deter research today by threatening the fruits of that research with rapid obsolescence. In normative terms, obsolescence creates a negative externality from innovations, and hence a tendency for laissez-faire economies to generate too many innovations, i.e too much growth. This "business-stealing" effect is partly compensated by the fact that innovations tend to be too small under laissez-faire. The model possesses a unique balanced growth equilibrium in which the log of GNP follows a random walk with drift. The size of the drift is the average growth rate of the economy and it is endogenous to the model ; in particular it depends on the size and likelihood of innovations resulting from research and also on the degree of market power available to an innovator.

Simulated Moments Estimation of Markov Models of Asset Prices

Abstract: This paper provides a simulated moments estimator (SME) of the parameters of dynamic models in which the state vector follows a time-homogeneous Markov process. Conditions are provided for both weak and strong consistency as well as asymptotic normality. Various tradeoff's among the regularity conditions underlying the large sample properties of the SME are discussed in the context of an asset pricing model.

Resource Cooptation Via Social Contracting: Resource Acquisition Strategies for New Ventures

Abstract: Analyzes the acquisition of resources through social transactions by independent entrepreneurs and corporate entrepreneurs, with a focus primarily on the corporate entrepreneurs. These social transactions include previous working relationships, voluntary connections, and community ties for independent entrepreneurs. Corporate entrepreneurs steal personnel time, appropriate materials, and conceal development activities. The importance of these social transactions in securing key resources for little to no cost is demonstrated through two examples: a Cuban American in the United States and a Swedish venture manager in a European mini-conglomerate. Two types of venture managers are discussed – the administrative venture manager and the social transactions-oriented manager. Cooptation is identified as the mechanism by which resources can be obtained. Two types of cooptation, legitimacy and underutilized goods, are presented. It is proposed that the social transactions-oriented managers are more likely to co-opt legitimacy (primiarly through association or endorsement) than are the administrative venture managers. Begging, borrowing, scavenging, and amplifying are the four strategies used for taking advantage of underutilized activities. This cooptation process involves the exploitation of social assets. These social assets are built by sharing information, solving and receiving help with problems, giving and receiving favors, and creating opportunities for people to demonstrate their skills and competence. Reasons why it is difficult for corporate entrepreneurs to take advantage of network resources are provided. The propositions presented in this analysis can provide the basis for future research. (SRD)

Developing an Intrapreneurial Assessment Instrument for an Effective Corporate Entrepreneurial Environment

Abstract: This study examines the dimensions of intrapreneurship culture and offers an instrument for assessing the effectiveness of an employee training program. The Intrapreneurial Assessment Instrument (IAI) is used to determine the internal environment of organizations, especially as it pertains to their capability to create and support intrapreneurial activity. A review of prior research identified a set of factors likely to be conducive to intrapreneurship. These were used to draw up the IAI; the tool was then tested in a training program in a Fortune 500 firm in the US Midwest. The results identified a number of environmental factors present in organizations implementing intrapreneurial concepts. Three initial factor descriptions are offered as fostering entrepreneurial activity inside corporations: (1) management support for intrapreneurship, (2) organizational structure, and (3) resource availability. The empirical evidence supports the need for structure associated with intrapreneuring in various organizations, and validates intrapreneurship training as an important means for changing individual perceptions about the work environment. Recommendations for further research include both the refining of the concept "intrapreneuring" and its generating environment. (CBS)

The Beveridge Curve

Abstract: Over the past thirty years, macroeconomists thinking about aggregate labor market dynamics have organized their thought around two relations, the Phillips curve and the Beveridge curve. The Beveridge curve, the relation between unemployment and vacancies, has very much played second fiddle. We think that emphasis is wrong. The Beveridge relation comes conceptually first and contains essential information about the functioning of the labor market and the shocks that affect it. Labor markets in the United States are characterized by huge gross flows. Close to seven million workers move either into or out of employment every month. While that movement could be consistent with workers reallocating themselves across a given set of jobs, recent evidence by Steve Davis and John Haltiwanger suggests that these flows are associated with high rates of job creating and job destruction. Using a measure of job turnover, defined as the sum of employment increases in new or expanding establishments and employment decreases in shrinking or dying establishments, Davis and Haltiwanger find that during 1979-83, a period of shrinking employment, job turnover in manufacturing averaged some 10 percent per quarter. From a macroeconomic viewpoint, the labor market is highly effective in matching workers and jobs, yet those flows are so large that they imply the coexistence of unfilled jobs and unemployed workers. Examination of the joint movement of unemployment and vacancies can tell us a great deal about the effectiveness of the matching process, as well as about the nature of shocks affecting the labor market. In this paper, we first develop a conceptual frame in which to think about gross flows, about the matching process, and about the effects of shocks on unemployment and vacancies. We then turn to the empirical evidence, using data for the postwar United States. We focus first on the matching process, estimating the "matching function," the aggregate relation between unemployment, vacancies, and new hires. We then interpret the Beveridge relation. More precisely, we look at the joint behavior of unemployment, employment, and vacancies, and infer from it the sources and the dynamic effects of the shocks that have affected the labor market over the past 35 years.

Entrepreneurship: Productive, Unproductive, and Destructive

Abstract: Examines the roles that entrepreneurs can play within a society and the allocation of their entrepreneurial activities. The role that is played by an entrepreneur is dictated by the economy's set of rules. As a result, the contributions made by entrepreneurs can vary based on the activities on which these entrepreneurs choose to focus. These contributions can be productive, unproductive, and even destructive. Unproductive activities today include tax evasion and rent seeking such as litigation and takeovers. Building on the Schumpeterian model, this analysis utilizes historical evidence from ancient Rome, medieval China, Dark Age Europe, and Renaissance Europe to support the proposition that dramatic differences in entrepreneurial activity can be found between one time and place and another based on the rules of that time and place. Further, the allocation of productive and unproductive entrepreneurial activities in an economy impacts its innovativeness and the dissemination of technological advances. Consequently, a society should encourage entrepreneurs to reallocate their activities toward productive activities. This shift is more likely to be achieved by modifying the rules in the economy that determine relative rewards for entrepreneurs than by attempting to change the goals of the entrepreneurs themselves. (SRD)

Purchasing Power Parity in the Long Run

Abstract: This paper re-examines the evidence on Purchasing Power Parity (PPP) in the long run. Previous studies have generally been unable to reject the hypothesis that the real exchange rate follows a random walk. If true, this implies that PPP does not hold. In contrast, this paper casts serious doubt on this random walk hypothesis. The results follow from more powerful estimation techniques, applied in a multilateral framework. Deviations from PPP, while substantial in the short run, appear to take about three years to be reduced in half

On The Behavior of Commodity Prices

Abstract: The classical theory of commodity price determination integrates myopic supply and demand on the one hand with competitive storage (speculation) under rational expectations on the other. Taking into account the fact that inventories mist; be non-negative, this paper derives from the theory testable implications on the behavior of prices, and makes a first attempt to confront these implications with the empirical evidence. The nonlinearities turn out to be a crucial ingredient in matching the stylized facts, particularity the asymmetries and the sharp upward flares that characterize many commodity prices. The model, simple as it is, goes a long way in reproducing the main features of the data for a range of commodities.

The Effect of Age at School Entry on Educational Attainment: An Application of Instrumental Variables with Moments from Two Samples

Abstract: This paper tests the hypothesis that compulsory school attendance laws, which typically require school attendance until a specified birthday, induce a relationship between the years of schooling and age at school entry. Variation in school start age created by children's date of birth provides a natural experiment for estimation of the effect of age at school entry. Because no large data set contains information on both age at school entry and educational attainment, we use an Instrumental Variables (IV) estimator with data derived from the 1960 and 1980 Censuses to test the age-at-entry/compulsory schooling model. In most IV applications, the two covariance matrices that form the estimator are constructed from the same sample. We use a method of moments framework to discuss IV estimators that combine moments from different data sets. In our application, quarter of birth dummies are the instrumental variables used to link the 1960 Census, from which age at school entry can be derived for one cohort of students, to the 1980 Census, which contains educational attainment for the same cohort of students. The results suggest that roughly 10 percent of students were constrained to stay in school by compulsory schooling laws.

Government Failures in Development

Abstract: This paper takes as a given the proposition that, in many developing countries, governmental policies have been highly distortive and harmful to economic growth. These policies have included omissions, such as neglect of infrastructure, and commission such as highly restrictive trade regimes and credit rationing. The issues arising from recognition that governments, like markets, are imperfect are discussed.

Measuring Brand Value with Scanner Data

Abstract: Using actual consumer choice data from a single-source scanner panel, we construct two measures of brand value which capture different aspects of brand equity. Brand Value measures perceived quality, the value assigned by consumers to the brand, after discounting for current price and recent advertising exposures. Brand Intangible Value isolates the component of brand value which cannot be directly attributed to the physical product, thus measuring the value created by such factors as brand name associations and perceptual distortions. We illustrate these measures in a study of the powder laundry detergent category and briefly relate the results to strategic variables (order of entry and cumulative advertising expenditures).

Banks and loan sales : marketing non-marketable assets / 1711

Abstract: A defining characteristic of bank loans is that they are not resold once created. Yet, in 1989 about $240 billion of commercial and industrial loans were sold, compared to trivial amounts five years earlier. Selling loans without explicit guarantee or recourse is inconsistent with theories of the existence of financial intermediation. What has changed to make bank loans marketable? In this paper we test for the presence of implicit contractual features of bank loan sales contracts that could explain this inconsistency. In addition, the effect of technological progress on the reduction of information asymmetries between loan buyers and loan sellers is considered. The paper tests for the presence of these features and effects using a sample of over 800 recent loan sales.