A cake for Cournot

A cake division mechanism is presented that is equivalent in terms of the size of the pieces of the cake n players’ receive in equilibrium to the quantities that n firms in a Cournot oligopoly supply in equilibrium. This mechanism extends to equivalence between cake division and Nash’s ‘divide the dollar’ game.     

Growth dynamics in a model of endogenous time preference

We incorporate endogenous time preference in a simple Diamond-type economy with production and analyze the resulting dynamics both for the competitive and command equilibrium. We assume an individual's rate of time preference is decreasing in consumption (decreasing marginal impatience) and show that this intuitively more appealing assumption is consistent with a stable, non-trivial competitive equilibrium. Analysis of the competitive equilibrium indicates that the observed ‘non-convergence’ of cross-country per capita income could partially be explained by cross-country differences in ‘innate patience’. Examination of the local dynamics around the ‘optimal’ solution suggests that this particular preference structure exhibiting diminishing marginal impatience may generate endogenous business cycle phenomenon.     

The knowledge production of ‘R’ and ‘D’

Many studies investigate the relationship between R&D and patents applying knowledge production functions. Using aggregated R&D may underestimate the productivity of ‘R’, as mainly ‘R’ but not ‘D’ leads to patents. Disaggregating ‘R’ and ‘D’ shows a significant premium of ‘R’ towards patenting.     

Limited asset markets participation, monetary policy and (inverted) aggregate demand logic

This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While ‘moderate’ participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by conventional wisdom. The slope of the ‘IS’ curve changes sign, the ‘Taylor principle’ is inverted, optimal welfare-maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. However, a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation. Our results may justify Fed's behavior during the ‘Great Inflation’ period.     

A learning-based model of repeated games with incomplete information

This paper tests a learning-based model of strategic teaching in repeated games with incomplete information. The repeated game has a long-run player whose type is unknown to a group of short-run players. The proposed model assumes a fraction of ‘short-run’ players follow a one-parameter learning model (self-tuning EWA). In addition, some ‘long-run’ players are myopic while others are sophisticated and rationally anticipate how short-run players adjust their actions over time and “teach” the short-run players to maximize their long-run payoffs. All players optimize noisily. The proposed model nests an agent-based quantal-response equilibrium (AQRE) and the standard equilibrium models as special cases. Using data from 28 experimental sessions of trust and entry repeated games, including 8 previously unpublished sessions, the model fits substantially better than chance and much better than standard equilibrium models. Estimates show that most of the long-run players are sophisticated, and short-run players become more sophisticated with experience.     

Overcoming free riding in multi-party computations—The anonymous case

This paper addresses the question of multi-party computation in a model with asymmetric information. Each agent has a private value (secret), but in contrast to standard models, the agent incurs a cost when retrieving the secret. There is a social choice function the agents would like to compute and implement. All agents would like to perform a joint computation, which input is their vector of secrets. However, agents would like to free-ride on others' contribution.A mechanism which elicits players' secrets and performs the desired computation defines a game. A mechanism is ‘appropriate’ if it (weakly) implements the social choice function for all secret vectors. namely, if there exists an equilibrium in which it is able to elicit (sufficiently many) agents' secrets and perform the computation, for all possible secret vectors. We show that ‘appropriate’ mechanisms approach agents sequentially and that they have low communication complexity.     

Regionalization, public spending and growth: a stylized model dealing with ‘predatory states’

In this paper, a micro-founded model analyzing the effects of ‘regionalization’ on economic activity is developed. It shows that the spatial division of public competencies can have an impact on the growth rate via the efficiency of governmental choices: initially advantageous for weak levels, decentralization (/reduction of regional size) becomes limited due to the risk of underestimation of the real profitability of public expenditure by local governments (non-internalized cross-border effects). In accordance with the theory, a transversal estimation for a sample of 51 countries for the 1990s establishes a ‘bell-shaped’ relation between indicators of regionalization and the quality of governance.     

Corporate venture capital in Germany: A comparative analysis of 2000 and 2003

Established corporations are often at a disadvantage vis à vis technology-based entrepreneurial firms when it comes to generating and adapting to radical technological and business-model innovation. Consequently, industrial corporations increasingly wanted to participate in the financial or strategic success of start-ups. The tool of choice for many corporations was Corporate Venture Capital (CVC). CVC had already seen two waves of popularity in the USA when it was introduced in Germany in the early 1990s. This development is often assumed to have come to a halt in 2001, when so-called ‘New Economy’ spiraled into decline.This paper analyzes central attributes of strategy, investment and organization of the CVC units active in Germany in 2000 and 2003. We find evidence for a continuation of strong CVC activity in Germany. We differentiate between CVC units that were a) active at both points in time, i.e. ‘survivors’ b) those that have closed down since 2000, i.e. ‘losers’ and c) those that were founded after 2000, ‘new entrants’. The comparison of the characteristics allows us to make inferences for the use of CVC.     

What’s spurious, what’s real? Measuring the productivity impacts of ICT at the firm-level

In order to assess the productivity effects of information and communication technologies (ICT), regressions based on cross–sectional firm–level data may yield unreliable results for the commonly employed production function framework. In this paper, various estimation biases and econometric strategies to overcome their sources are discussed. The effects are illustrated on the basis of a representative set of panel data for German service firms covering the period 1994 to 1999. The application of a suited SYS–GMM estimator yields evidence for significant productivity effects of ICT. However, these are substantially smaller than those suggested by cross–section estimates.I would like to thank Irene Bertschek, François Laisney, Georg Licht, Werner Smolny, Kevin Stiroh, Elke Wolf, Thomas Zwick and two anonymous referees for their helpful comments and the MIP–team for providing me with the data. This paper was written as part of the research project ‘‘Productivity and Spillover Effects from ICT as a General Purpose Technology’’ commissioned by the Landesstiftung Baden–Württemberg foundation.Final version received: September 2002/Final version accepted: April 2004     

Asynchronized multiperiod commitments and cycles

We consider a game where agents can synchronize or stagger their decisions. We compare the outcomes of both timing patterns, and show that spillovers and strategic interactions are crucial for such a comparison. A typology used in industrial organization, distinguishing four cases (‘Fat-Cat’, ‘Top Dog’, Lean and Hungry’, ‘Puppy Dog’), allows us to compare the actions taken in the staggered variant and in the synchronized one. The staggered variant exhibits cycles and players are both better-off when there are strategic complementarities between them. A timing game is then set-up so as to endogenize the choice between the two variants we study.Two examples are developed: (i) Bertrand competition and (ii) a wage setting game when there are two monopoly unions in two interrelated firms. We show that the staggering of price decisions generates counter-cyclical mark-ups in the first example, and the staggering of wage decisions generates cycling output in the industry in the second example.     

Asset ownership and market structure in oligopoly: Further results

How does the sale of assets from a small firm to a large firm affect the equilibrium price in oligopoly? Using the ‘cross-sectional differentiation’ technique introduced by Farrell and Shapiro (Rand Journal of Economics, 1990, 21, 275–292), I show that the equilibrium price rises if the common production technology is homogeneous of degree t, 0<t1.     

Some empirical evidence on the ‘discouraged worker’ effect

This note produces empirical evidence on the existence of a significant ‘discouraged worker’ effect in US data–namely, on the tendency for groups of secondary workers to move in and out of the labor force with the business cycle, looking for jobs when these are available, while giving up job search during recessions — by focusing on the behavior of the ‘not in the labor force’ series, as well as of two of its segments (‘going to school’, and ‘keeping house’), at the business-cycle frequencies. Both in the aggregate, and for a number of age–sex groups, the series display a clear counter-cyclical pattern, thus lending support to the discouraged worker notion.     

Punishment paths and cartel size

Using a ‘Dominant-group-fringe’ model, we show that the choice of a subgame perfect Nash equilibrium (SPNE) punishment path in the event that unilateral defection occurs depends upon the common discount parameter, and that when the discount parameter is given the punishment path may depend upon the size of the dominant group. The choice of punishment path is thus endogenous. A striking result is that only for sufficiently small dominant groups in sufficiently small industries are there cases where costs affect these choices. Consequently, costs are irrelevant to the choice of punishment in industries with a large number of firms.     

Tobin's q, investment, and the endogenous adjustment of financial structure

Should q theory be modified to take account of financial structure? This paper analyzes a general equilibrium q model where financial structure affects firm value. Agency costs and taxes combine to yield an interior solution for the endogenous debt–equity ratio. Although q is still a ‘sufficient statistic’ for investment, the endogenous adjustment of financial structure alters the relation between the interest rate and investment. In this model an increase in the corporate tax rate could either raise or lower the steady-state capital stock. Furthermore, both q and investment could jump in opposite directions to that of their steady-state values.     

A limit theorem for an approximate core of a large but finite economy

We present a formulation of an approximate core that can be sustained as an approximate equilibrium for a ‘large enough’ finite exchange economy whose traders need not have transitive, continuous or convex preferences.     

Give peas a chance: Transformations in food consumption and production systems

Food production chains can be organised in a variety of ways. Conventional ‘industrial’ agricultural practices are based on advanced breeding techniques and major inputs of chemical fertilisers and pesticides. Food produced in this way is transport-intensive, requires high-energy processing, relies on modern retailing systems and demands high-tech kitchens. Many argue that the industrialised systems should be dismantled and replaced with alternative methods of agriculture, food processing and distribution that emphasise social and environmental sustainability. This paper looks at the environmental and social sustainability of different strategies for food systems by analysing the whole chain of production, processing, distribution and consumption activities of the production of frozen peas, a vegetable that is ‘symbolic’ of modern food systems and the UK diet.     

Why do firms adopt CEO stock options? Evidence from the United States

This paper examines the determinants of stock option introduction as a part of CEO compensation in listed US firms during the 1994–2004 period. The results are consistent with agency costs and recruiting considerations, suggesting that firms do not adjust CEO compensation in order to address the ‘investment horizon’ problem. The findings also suggest that CEO stock option adoption is not necessarily influenced by the same factors that have been found in the literature to affect the level of CEO stock option compensation and the adoption of broad-based stock option incentives. Overall, the findings provide evidence for several theoretical predictions, thus adding to our understanding of managerial incentives.     

In-house information activities in an applied general equilibrium framework

Increasingly, firms' activities consist of information generating and processing activities, and information costs tend to dominate production costs. This indicates the necessity for explicitly incorporating private bureaucracies in economic modelling, if we want to understand economic development. Porat and Rubin's concept of the ‘secondary information sector’, which accounts for non-marketed information services produced in-house, is an attempt to account for and analyse intra-firm information activities at an industry and economy-wide level. The present study extends their work by embedding the sector in a simple computable general equilibrium model, using Japan in 1980 as an illustrative case study. Scenarios modelling changes in sectoral exports and domestic demand are conducted. Advantages and disadvantages of the secondary information sector concept are highlighted and areas for further research are indicated.