Beyond invention: the additive impact of incubation capabilities to firm value

Incubation is a process whereby the firm nurtures breakthrough discoveries and inventions to test their potential as new business platforms. The recent emergence of organizational roles associated with innovation incubation shows that internal incubation is becoming recognized as an important organizational capability. This development also suggests that firms that invest in discovery for competitive advantage recognize a need to leverage that investment more fully. While case studies describe incubation activities and note their importance, empirical research linking this capability to firm performance is limited. The current study represents an initial attempt at exploring the relationship empirically. Our main finding is that financial markets have difficulty valuing a firm's exploratory discovery investments and that the presence of an incubation capability positively moderates the impact of such investments on firm market valuation. The implication of this result is that investments in certain types of R&D may be suboptimized if there is not a parallel investment in a capability to incubate the opportunities that arise from potentially breakthrough inventions.     

How Should Slovenia Design Fiscal Policies in the Government Debt Crisis?

We investigate how fiscal policies should be designed in Slovenia during the next few years. Using the SLOPOL model, an econometric model of the Slovenian economy, we analyze the effects of different fiscal policies using simulations and determine optimal fiscal policies for Slovenia. We show that the optimal design of fiscal policies is rather close to the austerity course as detailed in the Slovenian Stability Program, revealing the small scope of possible alternative fiscal stabilization policies available due to the relatively low effectiveness of the fiscal instruments with respect to their influence on the business cycle in the Slovenian economy.     

Overeducation,job mobility and earnings mobility among holders of first degrees

Overeducation has been researched extensively for nearly three decades, but some major issues in regard to it are still topics of ongoing debate. By using a panel data, that combines a survey of two cohorts of Israeli first-degree holders and data from administrative sources on jobs and wages, we examine the contribution of job turnover, cognitive abilities and continuing graduate studies to the likelihood of overeducation and wage dynamics. The study produces four main findings. First, rapid job-switching makes a negative contribution to the increase in employee’s wage and there is a negative correlation between two variables – an employee’s tenure and the number of past employers in the years after the completion of degree studies – and the probability of being overeducated. Second, the contribution of the individual’s cognitive abilities and quantitative reasoning skills to the likelihood of becoming overeducated is negative. Third, the wages of overeducated employees are some 11% lower and rise more slowly than the wages of those whose level of schooling corresponds to their jobs; this outcome may be interpreted as indicating that the ‘scars’ of being overeducated tend to be long-lasting. Fourth, the overeducated workers have lower propensity to continue to advanced academic studies.     

“Core” and “Periphery” in a Monetary Union: A Macroeconomic Policy Game

We develop a dynamic game model of a two-country monetary union to study strategic interactions between macroeconomic policy makers, namely the central bank and governments. In this union, the governments of participating countries pursue national goals when deciding on fiscal policies, whereas the common central bank’s monetary policy aims at union-wide objective variables. The union considered is asymmetric, consisting of a core, with lower initial public debt, and a periphery, with higher initial public debt. For a symmetric demand shock, we derive numerical solutions of the dynamic game between the governments and the central bank using the OPTGAME algorithm. We show that mildly active cooperative countercyclical policies dominate noncooperative solutions and a scenario of no policy intervention. Optimal policies call for a brief expansionary action to bolster the effects on output and a return to a small fiscal primary surplus as soon as the crisis is over until the targeted level of public debt is reached.     

Search, common knowledge, and competition

This paper analyzes the effects of buyer search costs and seller private and common knowledge on seller competition. It shows that lack of common knowledge results in the equilibrium price continuously decreasing to the perfectly competitive one as buyer search costs for price decrease from positive for all buyers to zero for all buyers, even if each market agent's uncertainty (in the private knowledge) is small. At the same time, if the uncertainty of each seller about buyer valuations is small, the effects of a small change in the search costs or of information structure on pricing may be large (but continuous).     

Optimal macroeconomic policies in a financial and economic crisis: a case study for Slovenia

In this paper, we study different and, in particular, “optimal” reactions of fiscal (and to some extent monetary) policies to the financial and economic crisis of 2007–2009 in Slovenia, a small open economy that is part of the Economic and Monetary Union (EMU). Using an econometric model of the Slovenian economy, we simulate the effects of the global crisis under the assumption of no-policy reactions, i.e. assuming that macroeconomic policies are conducted without attempting to deal with the effects of the crisis. Next, we study the possibilities of fiscal policy reducing or even annihilating the effects of the crisis. We also investigate the optimal reaction of fiscal policies based on the assumption that Slovenian policy-makers behave as though they were optimizing an objective function. We show that optimal policies call for only a very modestly active countercyclical role of fiscal policies. There are strong trade-offs between countercyclical fiscal policies and the requirements of fiscal solvency.     

Communication strategy in partnership selection

This paper explores the communication and choice strategies of economic agents deciding on a partnership, where agents are uncertain about their payoffs, and payoffs of each agent depend on and are partly known to the potential partner. Business examples of such decisions include mergers, acquisitions, distribution channel partners, as well as manufacturing and brand alliances. Dating and marriage partner selection are also natural examples of this game. The paper shows that (a) when communication is informative, the communication strategy as a function of the expected payoff of the partnership involves pretending fit when expected payoff is high, pretending misfit when expected payoff is low, and telling the truth in the intermediate range, and (b) the condition for informativeness of communication is that the distribution of payoffs has thin tails. Furthermore, the paper shows that the possibility of communication, even when this communication is not restricted to be truthful, can decrease the expected payoff for both the sender and the receiver; in particular, it can decrease the expected social welfare.

ON TWO APPROACHES TO COHERENT RISK CONTRIBUTION

We compare two approaches to the coherent risk contribution: the directional risk contribution is defined as where ρ is a coherent risk measure; the linear risk contribution ρ^l(X; Y) is defined through a set of axioms, one of which is the linearity in X . The linear risk contribution exists and is unique for any ρ from the Weighted V@R class. We provide the representation for both risk contributions in the general setting as well as in some examples, including the MINV@R risk measure defined as where X₁, … , X_N are independent copies of X .     

Free in-network pricing as an entry-deterrence strategy

This paper analyzes the entry-deterring power of free in-network pricing with multiple incumbents. Free in-network pricing may deter entry since it creates network externality that intensifies competition. One may expect that a particular entry-deterrent strategy adopted by all incumbents would have more entry-deterring power than when it is adopted by some incumbents only. However, we show that when free-in network plan has entry-deterrence power with two incumbent firms, sometimes one incumbent offering free in-network plan may have more entry deterrence power than both firms offering free in-network plans. In other words, we find that an asymmetric adoption of entry-deterrence strategies by the incumbent firms may be the best for entry deterrence. This result highlights the importance of the strategic choice of the pricing plan as a function of not only the likelihood/cost of entry but also of the plan choices of other firms, and may partially explain the asymmetric strategies used by competing firms.