Effects of One-Way Spillovers on Market Shares, Industry Price, Welfare, and R & D Cooperation

With one-way spillovers, the standard symmetric two-period R&D model leads to an asymmetric equilibrium only, with endogeneous innovator and imitator roles. We show how R&D decisions and measures of firm heterogeneity—market shares, R&D shares, and profits—depend on spillovers and on R&D costs. While a joint lab always improves on consumer welfare, it yields higher profits, cost reductions, and social welfare only under extra assumptions, beyond those required with multidirectional spillovers. Finally, the novel issue of optimal R&D cartels is addressed. We show an optimal R&D cartel may seek to minimize R&D spillovers between its members.     

Share the Fame or Share the Blame? The Reputational Implications of Partnerships

We use an adverse selection model to study the dynamics of firms' reputations when firms implement joint projects. We show that in the case of joint projects a firm's reputation does not necessarily increase following a success and does not necessarily decrease following a failure. We also study how reputation considerations affect firms' decisions to participate in joint projects. We show that a high‐reputation partner is not necessarily preferable to a low‐reputation partner and, when implementation of the joint project by a single firm is possible, a high‐quality partner may not be preferable to a low‐quality partner.     

Joint venture evolution: extending the real options approach

Real options theory has emerged as a promising avenue to study joint venture (JV) evolution as a strategic response to managing uncertainty. We extend the real options approach by integrating it with game theory. Such a combined method enriches the valuation functions of each partnering firm and helps to identify the optimal decisions for exercising options in a JV. In our model, each firm's synergy from the joint operation and its knowledge acquisition capability (KAC) can significantly influence the competitive dynamics between partners, potentially affecting how each firm decides to acquire, divest, or dissolve. We employ a new solution technique in real options theory to capture the stochastic process of three factors, and use computer simulation to test the model under varying conditions. The results are stated in five testable propositions, providing a better understanding of the dynamics of a JV. We find that symmetries between partners in synergy or KAC contribute to stability or dissolution of the JV, whereas asymmetries in synergy or KAC make acquisition of the JV assets by one partner desirable. Copyright © 2008 John Wiley & Sons, Ltd.     

Intra‐firm differentiation of compensation systems: evidence from US high‐technology firms

While scholars have long recognised the influence of firm decisions on aspects of compensation (e.g. pay level and pay mix), prior compensation studies offer an ambiguous understanding regarding their scope. Some studies argue that firms customise compensation decisions according to employee groups, whereas others assume that firm compensation decisions apply uniformly throughout a firm. To address this research gap, the current study analyses pay levels and pay mixes for R&D employees and administrative employees in US high‐technology firms. Our empirical analyses show that firms make distinct compensation decisions for these two job families, but these decisions are ultimately consistent. These findings highlight firms' intention to strike a balance between customising compensation systems according to employee groups and maintaining internal consistency. Our findings add interesting insights to the strategic HRM and talent management literatures, which claim that firms should differentiate among employees when designing HRM systems.     

Delivery lags and buffer stocks in the theory of investment by the firm

This paper contains a dynamic model of a firm holding a stock of unfilled orders for output while facing a fixed delivery lag attached to acquiring new capital goods. The model leads to a two-stage optimal control problem where the initial time interval corresponds to the Marshallian short-run and the second interval is the period during which deliveries of capital goods may arrive. Optimality criteria are provided for both time intervals and the behavior of the firm is characterized along both adjustment paths. The short-run decisions of the firm are shown to be tied to long-run decisions planned by the firm.     

Interest rate, demand and input price uncertainty and the value of firms

In an infinite-horizon inventory model, an increase in interest rate uncertainty increases the value of a firm which has positive value. An increase in input price uncertainty increases the value of the firm. If decisions are made before the realization of demand uncertainty, increased uncertainty about an additive demand shock reduces the value of a price-setting firm with a concave value function, and leaves unchanged or increases the value of a quantity-setting firm. If decisions are made after the realization of demand uncertainty, an increase in the uncertainty of an additive demand shock increases the value of the firm.     

Strategic R&D Location by Multinational Firms: Spillovers, Technology Sourcing, and Competition

This paper develops a model of strategic interaction in R&D internationalization decisions between two multinational firms, competing both abroad and in their home markets. It examines different incentives for foreign R&D faced by a technology leader and a technology laggard. The model takes into account the impact of local inter firm R&D spillovers, (noncostless) international intra firm transfer of knowledge, and the notion that internal R&D increases the effectiveness of incoming spillovers. Analytical results suggest that greater efficiency of intra firm transfers and greater R&D spillovers increase the attractiveness of domestic R&D for the technology leader if the technology gap with the laggard is large. The lagging firm, in contrast, increases the share of foreign R&D as foreign technology sourcing becomes more effective. Competition encourages the leading firm to engage in foreign R&D to capture a larger share of profits on the foreign market, whereas the laggard concentrates more R&D at home to defend its home market position.     

Local institutions,external finance and investment decisions of small businesses in Vietnam

This study investigates the impacts of local institutions, external finance, and their joint effects on firm investment in Vietnam. Investment decisions are classified into two categories: fixed asset investment and non-fixed asset investment. Analysing a set of 1.3 million firm-year observations of businesses in Vietnam (2006–2016), we find evidence that local institutions (both formal and informal) positively influence fixed asset investment but negatively affect non-fixed asset investment. Also, we find that informal loans are positively associated with both types of firm investment while bank loans are negatively associated with both types of firm investment. More importantly, we find that the quality of local institutions is able to moderate firms’ external financing behaviour, leading to increased investment values.     

Durable-Goods Monopoly with Endogenous Innovation

While selling an existing product, a durable-goods monopolist may develop a new, improved product. The firm must consider the interaction between its intertemporal pricing and research and development (R&D) decisions. The interactions show a sharp dichotomy depending on pricing regimes. When it is optimal for the firm to continue to sell the old model along with the new model, the interactions disappear. However, when it is optimal for the firm to discontinue the sale of the old model after introducing the new model, the firm will face a time-inconsistency problem in its R&D decision .     

Environmental regulation and optimal investment behavior: A micro-economic analysis

This paper develops a simple optimal control model of the firm's investment decisions in the presence of environmental restrictions. The firm is assumed to jointly decide the optimal levels of gross investment, scrappage of capital, and maintenance expenditures. The results of the model indicate that all investment decisions, including both abatement equipment and productive capital, are affected by the manner in which environmental regulations are designed. Moreover, these impacts can be further altered if other unrelated regulations, such as rate base regulation, are concurrently imposed on the firm.     

Endogenous trading in credit default swaps

We introduce a real options model in order to quantify the moral hazard impact of credit default swap (CDS) positions on the corporate default probabilities. Moral hazard is widely addressed in the insurance literature, where the insured agent may become less cautious about preventing the risk from occurring. Importantly, with CDS the moral hazard problem may be magnified since one can buy multiple protections for the same bond. To illustrate this issue, we consider a firm with the possibility of switching from an investment to another one. An investor can influence the strategic decisions of the firm and can also trade CDS written on the firm. We analyze how the decisions of the investor influence the firm value when he is allowed to trade credit default contracts on the firm’s debt. Our model involves a time-dependent optimal stopping problem, which we study analytically and numerically, using the Longstaff–Schwartz algorithm. We identify the situations where the investor exercises the switching option with a loss, and we measure the impact on the firm’s value and firm’s default probability. Contrary to the common intuition, the investors’ optimal behavior does not systematically consist in buying CDSs and increase the default probabilities. Instead, large indifference zones exist, where no arbitrage profits can be realized. As the number of the CDSs in the position increases to exceed several times the level of a complete insurance, we enter in the zone where arbitrage profits can be made. These are obtained by implementing very aggressive strategies (i.e., increasing substantially the default probability by producing losses to the firm). The profits increase sharply as we exit the indifference zone.     

Firm Productivity and the Foreign‐Market Entry Decision

We use Japanese firm‐level data to examine how a firm’s productivity affects its foreign‐market entry strategy. The firm faces a choice between exporting and foreign direct investment (FDI). In the case of FDI, the firm has two options: greenfield investment or acquisition of an existing plant (M&A). If it selects greenfield investment, it has two ownership choices: whole ownership or a joint venture with a local company. Controlling for industry‐ and country‐specific characteristics, we find that the more productive a firm is, the more likely it is to choose FDI rather than exporting and greenfield investment rather than M&A.     

Entry‐Timing Advantages in Renewable Natural Resources Industries

In this paper, we explore the conditions of entry‐timing advantages in renewable natural resource industries. Drawing from behavioural theory of the firm, we classify firms in two groups depending on the different heuristics used to make entry decisions when facing the cyclical endogenous nature of these industries: crowd firms are procyclical, making decisions based on the current phase of the industry cycle, whereas anti‐crowd firms follow a countercyclical strategy, making uncertain, and risky decisions by estimation of the next phase of the cycle. Therefore, anti‐crowd firms anticipate the deployment of resources each cycle, potentially gaining entry‐timing advantages beyond those provided by traditional competitive isolating mechanisms. Through a mathematical simulation of a performance feedback model, we reveal that the entry‐timing advantage of the anti‐crowd group becomes possible when the rivalry in the industry and the price sensitivity of competitors are high, and when the time required to deploy the resources is short.     

Tax progression and training in a matching framework

This paper investigates the effect of tax progression on labour market outcomes in an equilibrium search model with wage bargain and endogenous training decisions. We find that the effect of tax progression on training depends crucially on which party invests and the tax function that is considered. When the firm invests, a higher tax progression may increase training levels. Moreover, when a complete contract is possible or when the firm invests, the optimal tax rate in a model with endogenous human capital is at least as high as in a model with exogenous human capital.     

Learning by a dominant firm

This paper is concerned with the optimal output decisions of a dominant firm in the presence of imperfect information about the rival's reactions. The model is multi-period with the profits in each period being independent of those in other periods. Consequently, if the rival's reaction parameter were known to the dominant firm, a myopic policy would be optimal, In the presence of imperfect information about the rival's unknown reaction parameter, the dominant firm acts in a Bayesian manner by updating its prior distribution based on the observations of the rival's outputs. Because of the multiplicative shape of the rival's reaction function, the Bayesian updating rule is a function of the dominant firm's decision variable, i.e. its output decisions. This creates a dependence of the future value of the dominant firm on the present output decision, and hence a myopic policy is not, in general, optimal. It is shown that through output experimentation the dominant firm will tend to overproduce and, consequently, will increase its expected discounted profits (market value).     

Robust firm pricing with panel data

Firms often have imperfect information about demand for their products. We develop an integrated econometric and theoretical framework to model firm demand assessment and subsequent pricing decisions with limited information. We introduce a panel data discrete choice model whose realistic assumptions about consumer behavior deliver partially identified preferences and thus generate ambiguity in the firm pricing problem. We use the minimax-regret criterion as a decision-making rule for firms facing this ambiguity. We illustrate the framework’s benefits relative to the most common discrete choice analysis approach through simulations and empirical examples with field data.     

Creating value through returns management: Exploring the marketing–operations interface

Managing the return flow of product is increasingly recognized as a strategically important activity that involves decisions and actions within and across firms. We focus specifically on returns management at the marketing-operations interface, by utilizing the conceptualization of customer value and its related drivers. In order to explore the phenomenon of returns management across a multi-disciplinary, managerial spectrum, a qualitative research methodology relying on individual managers’ perceptions was chosen to generate depth of understanding given the limited current understanding of the research topic under consideration. Our results suggest that functional integration at the marketing-operations interface can lead to better alignment of corporate resources and thus create higher levels of customer value. We also found the external business environment to impact how and why a firm creates customer value through the returns management process. Overall, our results suggest that when returns management is recognized as a matter of a firm's competitiveness, the joint role of operations and marketing is imperative to success.     

The role of debt and bankruptcy statutes in facilitating tacit collusion

Using a two‐period model this paper examines the quantity decisions of leveraged duopolists that are vulnerable to bankruptcy in the first period. When the firms have symmetric costs, a bankrupt firm reorganizes under Chapter 11. If a Chapter 11 firm experiences marginal cost relief, each firm produces a collusive output in period one in order to prevent its rival's financial demise. When the firms have asymmetric costs, the less efficient firm is liquidated under Chapter 7 upon bankruptcy. A predatory equilibrium exists, whereby the inefficient firm is driven from the market. Copyright © 1999 John Wiley & Sons, Ltd.     

Power in Profit-Maximizing Organizations

I study how profit-maximizing organizations make decisions. Members of organizations tend to have incompatible preferences over decisions, but willingness to pay for decisions plays a very limited role in actual decision making. A sizable empirical literature documents that people who provide critical services, are hard to replace, or deal effectively with external shocks are powerful; they have disproportionate influence over decisions. This can be profit maximizing because the right to shape the firm through its decisions renders the firm more attractive as an employer. Thus, the relative costliness of employees' departures should affect their relative power.     

Sharing Wealth: Evidence from Financial Ratios in Spain

Firms are managed on the basis of relationships between mutually involved groups, not only because of market forces, but also due to the influence that each group can exert over distribution decisions at a given moment in time. On the basis of a value added statement, it is possible to analyse the ability a firm has to reward all agents and to consider how the residual income is to be distributed. In this paper we set out to establish the tensions that arise between productive agents in the distribution of generated wealth. We carry out a time analysis of the movements between relationships that provide information on the distribution of that wealth, using data drawn from the Spanish Transport Equipment Manufacturing Industry. We propose a new multivariate dynamic linear model that is capable of analysing the joint evolution of the value added distribution ratios, with our particular objective being to throw light on the factors underlying this evolution. This analysis results in one single factor that explains 92.88 per cent of the total variation present in the residuals of the model.