INCENTIVES,EQUALITY AND CONTRACT RENEGOTIATIONS: THEORY AND EVIDENCE IN THE CHINESE BANKING INDUSTRY*

Renegotiation plays an important role in contract theory, but the empirical study of renegotiation is almost non‐existent in the literature. Using a unique dataset from the Chinese banking industry, we find that the large majority of managerial incentive contracts are renegotiated after performances are realized. We develop a model of contract renegotiation where supervisors and managers sign incentive contracts and then renegotiate them. In the unique equilibrium of the model, incentive contracts are almost always renegotiated ex post. Even though renegotiation is fully anticipated, incentive contracts affect performance. The predictions of the model find strong support from our empirical results.     

ORGANIZATIONAL STRUCTURE AND THE DIVERSIFICATION DISCOUNT: EVIDENCE FROM COMMERCIAL BANKING*

We provide evidence on organizational structure and performance at bank holding companies (BHC's). First, we show that a BHC's member banks benefit from access to internal capital markets. Second, we ask if these benefits are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHC's with fewer subsidiaries. However, because we study multi‐unit firms in a single industry, our results suggest that the diversification discount reported in the corporate finance literature reflects not only industry diversification, but also organizational structure.     

SURVIVAL AND GROWTH IN RETAIL AND SERVICE INDUSTRIES: EVIDENCE FROM FRANCHISED CHAINS*

Using data on franchised chains, which are the type of single‐product entities emphasized in industry dynamics models, we show that age and size affect growth and survival even after controlling for chain characteristics and unobserved chain‐specific efficiency. This implies that age and size affect firm growth and survival for reasons other than those emphasized in learning‐type models. We also find that several chain characteristics affect growth and survival directly, and thus controlling for firm characteristics is important. Finally, we find that chain size increases rather than decreases exit among young chains, and chains converge in size over time.     

COHERENCE OF THE KNOWLEDGE BASE AND THE FIRM'S INNOVATIVE PERFORMANCE: EVIDENCE FROM THE U.S. PHARMACEUTICAL INDUSTRY*

We examine the relationship between the coherence of the knowledge base and the innovative performance of U.S. pharmaceutical firms during the 1990's. We develop measures of the coherence and scope of the firms' knowledge base. Count data regression models show a strong link between these two properties and the firms' innovative performance. Firms experience decreasing returns to scale in research but larger firms enjoy a significant size advantage in innovation. Knowledge flows are necessary in knowledge production but not sufficient to secure its quality. Over time, the contribution of the scope and coherence of the knowledge base is increasing.     

DIVERSIFICATION STRATEGY,ENTRY MODE,AND PERFORMANCE: EVIDENCE OF CHOICE AND CONSTRAINTS

Despite theoretical arguments matching type of diversification strategy with mode of entry, the exact form of relationships between strategy, mode of entry, and performance remains enigmatic. Our analysis, based on two samples, demonstrates that matches between strategy and mode did improve performance in one time period, but not a second. In addition, the results show that exclusive reliance on a single mode (internal development or acquisition) can restrict performance. © 1997 by John Wiley & Sons, Ltd.     

THE DYNAMICS OF SELLER REPUTATION: EVIDENCE FROM EBAY*

We construct a panel of eBay seller histories and examine the importance of eBay's reputation mechanism. We find that, when a seller first receives negative feedback, his weekly sales rate drops from a positive 5% to a negative 8%; subsequent negative feedback ratings arrive 25% more rapidly than the first one and don't have nearly as much impact as the first one. We also find that a seller is more likely to exit the lower his reputation is; and that, just before exiting, sellers receive more negative feedback than their lifetime average.     

CONSUMER SWITCHING COSTS AND FIRM PRICING: EVIDENCE FROM BANK PRICING OF DEPOSIT ACCOUNTS*

We employ extensive information on bank deposit rates and area migration patterns to examine pricing relationships implied by switching costs. We argue that, because of the trade‐off between attracting new customers and exploiting old ones, banks offer higher deposit rates in areas experiencing more in‐migration. Further, because greater out‐migration implies that a locked‐in customer will not be with the bank for as many periods, banks will offer lower deposit rates in areas exhibiting greater out‐migration. Also, because this effect of out‐migration logically depends on the extent of in‐migration, an interaction effect exists. We find evidence strongly supporting these relationships.     

CONTRACTING FOR GOVERNMENT SERVICES: THEORY AND EVIDENCE FROM U.S. CITIES*

Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this ‘make‐or‐buy’ choice that highlights the trade‐off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services.     

FIRM HETEROGENEITY,IMITATION, AND THE INCENTIVES FOR COST REDUCING R&D EFFORT*

I develop and test a model of strategic R&D investments where innovating and non‐innovating firms compete on the basis of their ability to reduce costs and imitate rivals. I find that a larger proportion of non‐innovating rivals stimulates cost‐reducing investments and attenuates the disincentive effect of imitation by innovators on firm level R&D. Key model properties are verified by estimating the first order condition for the optimal choice of R&D, using the 1994 Carnegie Mellon survey of U.S. industrial R&D. Results also suggest that R&D and size are simultaneously determined, with R&D being proportional to size, as predicted by the theoretical model.     

OVERSEAS R&D ACTIVITIES AND HOME PRODUCTIVITY GROWTH: EVIDENCE FROM JAPANESE FIRM‐LEVEL DATA*

This paper investigates the impact of overseas subsidiaries' R&D activities on the productivity growth of parent firms using firm‐level data for Japanese multinational enterprises. Based on survey responses, we classify each overseas subsidiary's R&D as either ‘innovative R&D,’ which we hypothesize is likely to lead to the acquisition of foreign knowledge, or ‘adaptive R&D,’ which is more likely to lead to adaptation to local conditions. We find that overseas innovative R&D raises the parent firm's productivity growth, while adaptive R&D has no such effect. In addition, overseas innovative R&D does not improve the rate of return on home R&D.     

EDGEWORTH PRICE CYCLES: EVIDENCE FROM THE TORONTO RETAIL GASOLINE MARKET*

I exploit a new station‐level, twelve‐hourly price dataset to examine the strong retail price cycles in the Toronto gasoline market. The cycles appear similar to theoretical Edgeworth Cycles: strongly asymmetric, tall, rapid, and highly synchronous across stations. I test a series of predictions made by the theory about how firm behaviors would differentially evolve over the path of a cycle. The evidence is consistent with the existence of Edgeworth Cycles and inconsistent with competing hypotheses. While the cycles are an interesting phenomenon for study in their own right, the evidence has important policy and welfare implications.     

FINANCIAL VALUE OF REPUTATION: EVIDENCE FROM THE eBAY AUCTIONS OF GMAIL INVITATIONS*

In this article, I utilize a unique collection of auctions on eBay to study the influence of seller reputation on auction outcomes. In a market of homogeneous goods with non‐enforceable contracts, I find that sellers who improve their reputation by one quintile from the lowest, experience a 6.2% higher probability of sale and a 6.1% hike in valuation after adjusting for truncation bias from failed auctions and explicitly controlling for unobservable seller heterogeneity. This study also shows that in addition to a dimension of reputation universal across different product markets, the product‐specific dimension of reputation significantly affects the auction outcomes.     

THE PRICE EFFECT OF ELIMINATING POTENTIAL COMPETITION: EVIDENCE FROM AN AIRLINE MERGER*

This paper analyzes the gain in pricing power that a firm achieves by merging with a potential competitor in its market. Using pricing data for the merger of USAir and Piedmont, empirical analysis finds that prices rose by 5.0 to 6.0 per cent on routes that one carrier served and the other was a potential entrant. This was more than half the increase on routes where the two carriers had been direct competitors. Other important factors included carrier size, market concentration, incumbent's identity and the potential entrant's presence at one or both endpoints.     

VERTICAL MERGERS,FORECLOSURE AND RAISING RIVALS' COSTS – EXPERIMENTAL EVIDENCE*

The hypothesis that vertically integrated firms have an incentive to foreclose the input market because foreclosure raises its downstream rivals' costs is the subject of much controversy in the theoretical industrial organization literature. A powerful argument against this hypothesis is that, absent commitment, such foreclosure cannot occur in Nash equilibrium. The laboratory data reported in this paper provide experimental evidence in favor of the hypothesis. Markets with a vertically integrated firm are significantly less competitive than those where firms are separate. While the experimental results violate the standard equilibrium notion, they are consistent with the quantal‐response generalization of Nash equilibrium.     

DO ROCKETS RISE FASTER AND FEATHERS FALL SLOWER IN AN ATMOSPHERE OF LOCAL MARKET POWER? EVIDENCE FROM THE RETAIL GASOLINE MARKET*

This study explores the possibility that local market power influences the observed asymmetric relationship between changes in wholesale gasoline costs and changes in retail gasoline prices. I exploit an original data set of weekly gas station prices in Southern California from September, 2002 to May, 2003, and take advantage of detailed station and local market level characteristics to determine the extent to which geographic and product differentiation influence price response asymmetry. I find that brand identity, proximity to rival stations and local market features and demographics each influence a station's predicted price‐response asymmetry.     

PRICE DISPERSION IN THE SMALL AND IN THE LARGE: EVIDENCE FROM AN INTERNET PRICE COMPARISON SITE

This paper examines four million daily price observations for more than 1,000 consumer electronics products on the price comparison site http://Shopper.com . We find little support for the notion that prices on the Internet are converging to the 'law of one price.' In addition, observed levels of price dispersion vary systematically with the number of firms listing prices. The difference between the two lowest prices (the 'gap') averages 23 per cent when two firms list prices, and falls to 3.5 per cent in markets where 17 firms list prices. These empirical results are an implication of a general 'clearinghouse' model of equilibrium price dispersion.