Modeling stochastic innovation races

We consider a firm moving towards a stochastic final destination to be chosen from a discrete set after a decision period. The decision period itself may be deterministic or stochastic. We assume the firm can move at variable innovation (R&D) speed associated with a monotone nondecreasing variable cost, and it can also stop and move anywhere. There is a fixed cost per time unit “carried” by the firm as well, associated with keeping at the knowledge (technology) frontier. We investigate various types of the firm's optimal trajectory in the R&D race during the decision period. The model is adapted and applied to racing behaviour in the Japanese telecommunication industry.     

Impact of the adoption of information and communication technologies on firm efficiency in the Tunisian manufacturing sector

This paper aims at measuring the impact of information and communication technology use on the efficiency of the Tunisian manufacturing sector at the firm level within a simple theoretical framework. We are using a firm-level panel data for the manufacturing sector in Tunisia to investigate whether adoption of ICT influences efficiency in factor use. The analysis is conducted through the use of a parametric method to measure technical efficiency. We estimate a stochastic production frontier and the relationship aims to explain technical efficiency differentials in a single stage as suggested by Battese and Coelli [Battesse, G.E, Coelli, T.J. (1995). A model for technical inefficiency in a stochastic frontier production function for panel data. Empirical Economics, 20, 325–332].The results have confirmed the presence of positive returns to ICT capital. We have found that the impact of ICT on efficiency is strong. Our results also suggest that it is important to carefully control for human capital related characteristics of employment when studying the effect of ICT. The evidence shows that achieving benefits from investment in ICT requires complementary investments and changes in human capital. This means that the combined use of ICT and human capital in a firm would enhance its efficiency beyond the direct effects of these factors taken alone.     

Stochastic reaction functions in 2 × 2 duopoly

A reaction function is a contingency plan that specifies how a firm will react to a move made by its competition. This includes the classical Cournot reaction function. Our stochastic reaction functions are the rules by which firms revise their prior distributions on their competitors' sets of actions. The asymptotic stability of a class of stochastic reaction functions is examined in this paper. It is shown that there exists a class of reaction functions that are either asymptotically stable in the Cournot-Nash sense or asymptotically Pareto optimal. Our analysis does not rely on differentiability and other assumptions traditionally imposed in the literature.     

The Microeconomics of an R&D-Based Model of Endogenous Growth

This paper explores the microeconomic structure underlying a class of endogenous growth models in which product differentiation and stochastic quality growth coexist. The general equilibrium model generates a stationary stochastic equilibrium in which a nondegenerate ergodic distribution of firm size depends systematically on parameters of the model. Features of the model necessary for stable endogenous aggregate growth are explored, and predictions of the model are compared with microeconometric evidence on R&D intensity, firm growth, and concentration.     

Maximum entropy: a stochastic frontier approach for electricity distribution regulation

The literature on incentive-based regulation in the electricity sector indicates that the size of this sector in a country constrains the choice of frontier methods as well as the model specification itself to measure economic efficiency of regulated firms. The aim of this study is to propose a stochastic frontier approach with maximum entropy estimation, which is designed to extract information from limited and noisy data with minimal statements on the data generation process. Stochastic frontier analysis with generalized maximum entropy and data envelopment analysis—the latter one has been widely used by national regulators—are applied to a cross-section data on thirteen European electricity distribution companies. Technical efficiency scores and rankings of the distribution companies generated by both approaches are sensitive to model specification. Nevertheless, the stochastic frontier analysis with generalized maximum entropy results indicate that technical efficiency scores have similar distributional properties and these scores as well as the rankings of the companies are not very sensitive to the prior information. In general, the same electricity distribution companies are found to be in the highest and lowest efficient groups, reflecting weak sensitivity to the prior information considered in the estimation procedure.

     

Rapid Technology Change, ‘Technological Visions’, Corporate Organisation And Market Structure

This paper is a contribution to the analysis of how rapid technology change influences market structure. The paper uses a simple simulation model to explore the effects of four main factors on the development of market structure. These are: (1) the variance (or unpredictability) of the technology trajectory; (2) the speed with which the organisation's ‘technological vision’ adjusts to ongoing technological developments; (3) the absorptive capacity of each division in the multi-divisional firm to experience gained in other divisions; (4) the extent to which competence-destroying innovations generate greater cost penalties for the division of a multi-divisional firm than for a comparable mono-divisional firm. Simultion results are obtained for 100 technological trajectories, and a variety of parameterisations. While there is a tendency for noisier trajectories to disadvantage the larger multi-divisional firm, there are conditions under which such a firm benefits from a noisy technological environment. When competence-destorying innovations affect the division of a multi-divisional firm no worse than the comparable mono-divisional firm, the multi-divisional firm is not disproportionately affected by a noisy trajectory. It may, however, be seriously damaged by a slow adjustment of technological vision, especially when all scale economies are dynamic (rather than static). The simulations confirm that the absorptive capacity of each division to experience from others can be critical in determining the ultimate market structure. A brief empirical motivation for the model is offered by reference to some case studies of the semiconductor industry.     

Uncertainty and the comparative dynamics of stock price

This article derives an envelope theorem for dynamic economic problems under conditions of uncertainty. The theorem is motivated through analysis of a firm with an objective of maximizing shareholders' wealth. Envelope results are used to determine how the value of the optimizing firm is expected to change in response to shifts in several variables including the risk-free interest rate, the market risk premium, the tax rate, and the prices of output and inputs. Uncertainty is introduced into the model using a general measure-theoretic approach which does not require restrictive assumptions regarding the behavior of the problem's stochastic variables.     

Knowledge sourcing and firm performance in an industrializing economy: the case of Taiwan (1992–2003)

We examine the impact of R&D and technology imports on firm performance in Taiwan??s manufacturing industry in a policy context of industrial upgrading. To do so, we estimate a Translog production function on two panels (covering 1992?C1995 and 1997?C2003), using stochastic frontier models. We find that the effects of both knowledge inputs become significant in a larger number of industries in the second panel. These results suggest that the policies encouraging innovation implemented from 1991 onwards paid off in the second half of the 1990s, with innovation driving firm sales. In traditional industries, the effect of innovation can be interpreted as an effort to catch up with the global technology frontier. In the electronics and high-technology industries, it rather testifies of the emergence of a new domain of specialization for Taiwan??which was largely enabled by the aforementioned innovation policies.     

Bargaining, Bonding, and Partial Ownership

This article provides a theory of interfirm partial ownership. We consider a setting in which an upstream firm can make two alternative types of investment: either specific investment that only a particular downstream firm can use or general investment that any downstream firm is capable of using. When the benefits from specific and general investments are both stochastic, equity participation by the downstream firm in the upstream firm can lead to more efficient outcomes than take-or-pay contracts. The optimal ownership stake of the downstream firm is less than 50 percent under a natural assumption about relative bargaining power.     

Does market competition promote innovation efficiency in China’s high-tech industries?

ABSTRACT

Despite extensive discussion about the relationship between market competition and innovation performance, the impact of market competition on the innovation efficiency of high-technology industries in a transitional economy is still unclear. The article is based on panel data of 17 subsectors of China’s high-tech industry spanning the 2001–2016 period. Using stochastic the frontier analysis model, we empirically test the impact of market competition on two-stage innovation efficiency from the perspective of the industry. The results indicate that market competition and firm scale have positive and significant effects on the efficiency of two-stage innovation, the effects of industry export intensity and government intervention on R&D efficiency are negative, but the effects are different for the efficiency of the commercialisation of technology. Based on the results of the empirical analysis, this paper compares the trends and the differences between R&D efficiency and commercialisation efficiency, and then uses cluster analysis to reclassify China’s high-tech industries into three categories, thus revealing the disconnect and imbalance within China’s high-tech industries. At the end of the article, we present some possible policy recommendations.     

Collusion in Dynamic Bertrand Oligopoly with Correlated Private Signals and Communication

This paper studies collusion in repeated Bertrand oligopoly when stochastic demand levels for the product of each firm are their private information and are positively correlated. It derives general sufficient conditions for efficient collusion through communication and a simple grim-trigger strategy. This analysis is then applied to a model where the demand signal has multiple random components which respond differently to price deviations. In this model, it is shown that the above sufficient conditions hold if idiosyncratic noise terms are sufficiently small. Journal of Economic Literature Classification Numbers: C72, D82.     

Managerial pay adjustments: Decomposition and impact on firm productive efficiency

This paper decomposes managerial pay adjustments and examines their impact on firm productivity based upon Taiwanese firm panel data. Pay adjustments are decomposed into components arising from three sources: a scheme based on the external labour market comparisons, a scheme derived from the changes in firm and manager characteristics, and transitory pay adjustments. The stochastic frontier model is used to test how these pay components affect firm productivity. Empirical results suggest that the pay adjustments based on the comparison between managers' actual pay and their market-clearing pay are positively related to the output and technical efficiency of the firms, whereas this productivity-boosting effect cannot be seen for other components. This paper shows the importance of the external labour market in connecting managerial pay to firm productivity, and provides a model for the research of managerial pay in an environment where the compensation structure does not have apparent stock incentives.     

Progressive taxation,tax exemption,and corporate liquidation policy

This paper develops a real options model of a firm that operates in continuous time with an infinite horizon. The firm receives stochastic profit flows that are subject to progressive taxation. Tax progression arises from an exogenously given tax exemption threshold that makes the average tax rate increase with the tax base. The firm possesses an option to liquidate its operation, which is optimally exercised when the firm's profit flow reaches an endogenously determined threshold level (the liquidation trigger) from above. We show that the firm's liquidation trigger under progressive taxation increases with either a reduction in the tax exemption threshold or an increase in the corporate income tax rate. Corporate income taxes are thus not neutral when tax schedules are progressive.     

The Welfare Economics of Water Resource Allocation over Time

An operational stochastic capacity expansion model for a survival conscious firm is developed and applied to shrimp fishing in which the entrepreneur evaluates all the information known to him at the time of decision. The results show the effect of survival considerations on the growth in net worth of a firm making sequential and irreversible purchases of physical capital with uncertain future yields. The survival model is applied to shrimp fishing on the Texas Gulf Coast and the reults are compared with those of a simple model in which survival is not considered. Bankruptcy could clearly result from use of the simple model; survival of the firm is guaranteed by use of the survival model.     

市场和技术对企业新技术采用最优时机的影响

基于古诺模型,研究了产品的可替代程度和技术的有效性对企业采用新技术的时机的影响。结果表明:率先采用新技术的企业采用新技术的时机与产品的可替代程度呈倒U型关系;当产品的可替代性足够大且技术有效性充分小时,较晚采用新技术的企业采用新技术的时机会随市场竞争的加剧而提前;两类企业采用新技术的时机与技术的有效性均成负相关关系;面对技术有效性的同水平提高,较晚采用新技术的企业采用新技术的时机将提早得更多。     

Risk-Sensitive Dynamic Market Share Attraction Games

We present partial results showing that risk-sensitive oligopolists would spend less on advertising than would their risk-neutral counterparts. The model is an infinite-horizon stochastic game in which each firm's “goodwill” is a random function of both its own and its competitors' current and past advertising expenditures. Single-period firm profits have a market share attraction form. Each firm seeks to maximize its expected exponential utility of the sum of discounted profits. We analyze the impact that risk sensitivity and other parameters have on equilibrium advertising strategies by exploiting the special structure of the stochastic game model.Journal of Economic LiteratureClassification Number: C73.     

Uncertainty Resolution and Strategic Trade Policy in Oligopolistic Industries

This paper investigates a government's choice of strategic trade policy when the domestic firm observes a private noisy signal about the stochastic market demand while in competition with a rival firm. The government chooses between quantity controls and subsidies to maximize profits of the domestic firm. Assuming that firms compete à la Cournot in a third country, it is shown that the optimal trade policy depends not only on demand uncertainty but also on the predictability of the true market demand by the firms.     

Technological expectations and adoption of improved technology

Attention is focused upon the adoption (demand) rather than the creation (supply) of new technology, which improves from time to time. Based on the expected flow of technological progress over which the firm (demander) has no control, it must decide either to adopt the current best available technology or to postpone adoption. The distinguishing features of the model are that more than one technological innovation is anticipated and expectations about the likelihood of such innovations are revised as time passes since the last innovation. Our analysis shows that the firm will adopt the current best practice if its technological lag exceeds a certain threshold; moreover, as time passes without new technological advances it may become profitable to purchase a technology that has been available even though it was not profitable to do so in the past.     

Innovation and Performance: Benchmarking Australian Firms

This article empirically analyses the link between innovation and performance using a sample of large Australian firms, with a specific aim of developing benchmarking tools. Innovation is measured by firms' investment in R&D and applications for patents, trademarks and designs. An innovation index is constructed to provide one method of benchmarking. The index incorporates a firm's innovative activities into a single figure after accounting for firm size. The index provides a ranking of the most innovative firms in Australia. A second method of benchmarking uses a stochastic production frontier. This type of analysis identifies the firms which are located closest to a ‘best practice innovation frontier’.     

Empirical Patterns of Firm Growth and R&D Investment: a Quality Ladder Model Interpretation

We present a partial equilibrium model of endogenous firm growth with R&D investment and stochastic innovation as the engines of growth, drawing on the quality ladder models in the macro growth literature, and the literature on patent races and the discrete choice models of product differentiation. The model fits a number of empirical patterns well, including: (i) a skewed size distribution of firms with persistent differences in firm sizes, (ii) firm growth independent of firm size, as stated in the so-called Gibrat's law, and (iii) R&D investment proportional to sales.