Union structure and firms' incentives for cooperative R&D investments

Abstract .  We investigate the impact of alternative unionization structures on firms' incentives to invest on cost-reducing R&D and to form Research Joint Ventures (RJVs), in the presence of R&D spillovers. We show that if firms invest non-cooperatively and spillovers are low, R&D investments are higher under centralized rather than under decentralized wage-setting. In contrast, investments are always higher under decentralized wage-setting in the case of RJVs. Firms' incentives to form an RJV are stronger under centralized wage-setting if and only if spillovers are low enough. Finally, centralized wage-setting may hinder the formation of costly RJVs and their potential welfare benefits.     

Investment climate and firm productivity: an application to Vietnamese manufacturing firms

The fundamental aspect of a national competitive advantage is a good investment climate. Understanding the role of the investment climate in generating firm productivity has received extensive attention by policymakers and economists in many countries. The article studies the effect of different dimensions of the investment climate on firm productivity. Using a large dataset of Vietnamese manufacturing firms, the article finds that deficiencies in the investment climate are prejudicial to firm productivity and competition. Furthermore, in examining the effect of corruption in association with the quality of the business environment, the study also investigates the possibility that corruption may compensate firms for a bad investment climate or at least may neutralize the negative impact of inefficient government regulations. In other words, corruption acts as ‘speed money’ to improve the efficacy of the provision of public services or provides leeway for entrepreneurs to bypass the inefficient regulations. This situation, however, is extremely harmful to the economy in the long run because it distorts the market and erodes the incentives for productive investments. Developing countries therefore need to put much more effort into institutional reforms, especially fighting corruption and efficiency in the provision of public goods and services.     

Product differentiation, process R&D, and the nature of market competition

We investigate the relationship between process and product R&D and compare the incentives for both types of R&D under different modes of market competition (Bertrand versus Cournot). It is shown that: (i) process R&D investments increase with the degree of product differentiation and firms invest more in product R&D when they can do process R&D than when they cannot; (ii) Bertrand firms have a stronger incentive for product R&D whereas Cournot firms invest more in process R&D; and (iii) cooperation in product R&D promotes both types of R&D relative to competition whereas cooperation in both types of R&D discourages R&D relative to cooperation in just product R&D.     

Investment Incentives in Procurement Auctions

This paper investigates firms' incentives to invest in cost reduction in the first price sealed bid auction, a format largely used for procurement. Two central features of the model are that we allow firms to be heterogeneous and that investment is observable. We find that firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants and that this is socially inefficient. These results have implications for market design when investment is important.     

Globalization,product differentiation,and wage inequality

Abstract This paper develops a two‐country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intra‐industry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. As long as some industries remain shielded from international competition, the welfare implications of globalization are found to be generally ambiguous.     

Creation of jobs and firm-sponsored training in a matching model of unemployment

We offer a search and matching model with firms that create job vacancies and are willing to sponsor general skills training. The spillover of skilled labor between firms has the dual effect of increasing job vacancies and enhancing firms’ incentives for free riding. The former effect is combined with a reduction in search costs to cause a positive feedback between the supply of skilled labor and the creation of job vacancies, suggesting that firms encourage each other. On the other hand, with the latter effect, search costs are reduced, inducing firms to take a free ride on each other’s investments, thereby decreasing the supply of skilled labor and the creation of job vacancies. A reduction in search costs can lead to different results depending on which of the two mechanisms is actualized. Additionally, our analysis allows for “labor poachers,” or firms absorbing skilled labor in the market, to consider direct competition between training firms and poaching firms.      

Competition, entry and the social returns to infrastructure in transition economies

This paper presents a simple model for analysing the contribution of investments in physical and institutional infrastructure to the transition process. In addition to the direct cost savings, infrastructure investment generates important indirect effects, or transition impacts . The model shows that, by reducing transaction costs, infrastructure intensifies product market competition. This leads to more effective weeding out of the existing high-cost firms in the market. In this model, infrastructure also increases the incentives for low-cost firms to restructure which generates additional efficiency gains, but exacerbates the existing cost asymmetry in the economy. Finally, infrastructure investment enhances the incentives for relatively low-cost firms to enter the market, and thus improves the efficiency of the entry process. The importance of these transition impacts of infrastructure is dependent upon features of the economy, such as the degree of cost asymmetry among firms, the proportion of high-cost firms, the cost of restructuring and entry costs for new firms.
JEL classification: L1, O1, P2.     

The Layoff Rat Race*

We investigate how discretionary investments in general and specific human capital are affected by the possibility of layoffs. After investments are made, firms may have to lay off workers, and will do so in inverse order of the profit that each worker generates. Greater skill investments, especially in specific human capital, contribute more to a firm's bottom line, so that workers who make those investments will be laid off last. We show that as long as workers' bargaining positions are not too weak, workers invest in specific human capital in order to reduce layoff probabilities. Indeed, workers over‐invest in skill acquisition from a social perspective whenever their bargaining power is strong enough, even though they only receive a share of any investment. More generally, we characterize how equilibrium skill investments are affected by the distribution of worker abilities within firms, the probability that a firm will downsize, and the distribution of employment opportunities in the economy.     

Managerial incentives and collusive behavior

I characterize the effects of empirically observed managerial incentives on long-run oligopolistic competition. When managers have a preference for smooth time-paths of profits - as revealed by the empirical literature on “income smoothing” - manager-led firms can sustain collusive agreements at lower discount factors. Capped bonus plans and incumbency rents with termination threats make collusion supportable at any discount factor, independent of contracts' duration. When managers have these preferences/incentives and demand fluctuates, “price wars during booms” need not occur: the most collusive price may then be pro-cyclical.     

Procurement favouritism and technology adoption

It is well known that the design of cost minimizing procurement rules for the selection of a contractor among distinct technological groups requires the favouritism of inefficient firms. In this paper, I show that, if technology adoption is non-contractible, these policies will also provide optimal incentives for the inefficient firms to adopt more efficient technologies.     

Competition and innovation: an experimental investigation

The paper analyzes the effects of more intense competition on firms’ investments in process innovations. More intense competition corresponds to an increase in the number of firms or a switch from Cournot to Bertrand competition. We carry out experiments for two-stage games, where R&D investment choices are followed by product market competition. An increase in the number of firms from two to four reduces investments, whereas a switch from Cournot to Bertrand increases investments, even though theory predicts a negative effect in the four-player case. The results arise both in treatments in which both stages are implemented and in treatments in which only one stage is implemented. However, the positive effect of moving from Cournot to Bertrand competition is more pronounced in the former case.     

University‐firm competition in basic research and university funding policy

We characterize equilibrium investments in basic research by the commercial and university sectors contingent on public funding of the university. We find that firms invest in basic research despite the opportunities for free riding and we present conditions under which firms even have incentives to augment the public funding to the university. We characterize the socially optimal volume of public funding for the university sector. Finally, we compare total investments in a mixed duopoly with those of duopolies composed of two universities as well as two profit‐maximizing firms.     

Import Penetration and Domestic Process Innovation

This paper develops a model of R&D competition between domestic and foreign firms that explicitly incorporates the effect of the market structure. We focus on how differences in costs modify the effects of increases in the number of foreign firms on R&D investments of domestic firms. We show that an increase in the number of foreign firms may have a positive effect on a domestic firm's R&D investment and also show that two trade policies, tariffs or quotas, could have different effects on R&D investments of domestic firms. A welfare analysis shows that greater cost advantages increase social welfare.     

COMPETITION‐ACCELERATING PUBLIC INVESTMENTS*

We investigate the effects of infrastructure investments that reduce transport costs. We use a spatial model of Salop (1979). It is well known that the number of firms is excessive at free‐entry equilibrium (excess entry theorem). We find that the optimal investment level exceeds the ex post cost‐minimising level because investments accelerate competition and reduce the number of entering firms; resulting in the improvement of welfare. We also show that, in cases where the excess‐entry theorem is true, the desirable policy is the one accelerating, rather than restricting, competition.     

Endogenous spillovers and incentives to innovate

Summary. We present a new approach to endogenizing technological spillovers. Firms choose levels of a cost-reducing innovation from a continuum before they engage in competition for each other's R&D-employees. Successful bids for the competitor's employee then result in higher levels of cost reduction. Finally, firms enter product market competition. We apply the approach to the long-standing debate on the effects of the mode of competition on innovation incentives. We show that incentives to acquire spillovers are stronger and incentives to prevent spillovers are weaker under quantity competition than under price competition. As a result, for a wide range of parameters, price competition gives stronger innovation incentives than quantity competition. Received: February 1, 1999; revised version: November 14, 2001     

Solving coordination failure with “all-or-none” group-level incentives

Coordinating activity among members is an important problem faced by organizations. When firms, or units within firms, are stuck in bad equilibria, managers may turn to the temporary use of simple incentives—flat punishments or rewards—in an attempt to transition the firm or unit to a more efficient equilibrium. We investigate the use of incentives in the context of the “minimum-effort,” or “weak-link,” coordination game. We allow groups to reach the inefficient equilibrium and then implement temporary, flat, “all-or-none” incentives to encourage coordination on more efficient equilibria. We vary whether incentives are positive (rewards) or negative (penalties), whether they have substantial or nominal monetary value, and whether they are targeted to a specific outcome (the efficient equilibrium) or untargeted (apply to more than one outcome). Overall, incentives of all kinds are effective at improving coordination while they are in place, but there is little long-term persistent benefit of incentives—once incentives are removed, groups tend to return to the inefficient outcome. We find some differences between different kinds of incentives. Finally, we contrast our results to other recent work demonstrating greater long-term effectiveness of temporary incentives.      

Technology, agglomeration, and regional competition for investment

Abstract.  Competition for firms by region has a long-standing history, and the academic literature has debated whether such competition is efficient. We develop a model that explores technology development by firms facing regional competition for their investment and examine the endogenous determination of region policy, firm technology, and agglomeration externalities. We find a new source of inefficiency – regional competition leads firms to inefficiently distort their development and selection of production technology to improve their standing in the regional competition for their investment. We show that these inefficient firm decisions on technology and location can also weaken agglomeration externalities.     

A Note on the Adverse Effect of Competition on Consumers

It is usually believed that higher competition, implying more active firms, benefits consumers. We show that this may not be the case in an industry with asymmetric cost firms. A rise in the number of more cost‐inefficient firms makes the consumers worse off in the presence of a welfare‐maximizing tax/subsidy policy. A rise in the number of more cost‐inefficient firms also reduces social welfare.     

Stock market-driven investment: new evidence on information,financing and agency effects

This study provides a theoretical model and empirical analysis to jointly examine the information, financing and agency effects, the three channels through which the stock market can actively influence corporate investment decisions and firm performance. First, stock market affects corporate investments, and such impact varies with different market valuation measures, types of investments and firm characteristics. Second, stock market valuation affects investments through the channel of corporate financing, supporting the financing hypothesis. Third, stock market-driven investments have differential impacts on the future operating performance of firms. Investments driven by market valuation of firm-specific information have a positive effect on future performance. In contrast, investments driven by market-wide sentiment have a negative effect on future performance. Fourth, consistent with the information hypothesis, market-driven investments are value-enhancing for firms with better external monitoring by analysts and institutional investors. Lastly, consistent with the agency hypothesis, market-driven investments are value-destroying when firms lack external monitoring, proper managerial incentives and independent board of directors.     

Productivity drivers of infrastructure companies: Network industries utilizing economies of scale in the digital era

What drives the productivity dynamics of infrastructure companies? Using a panel of firms in 14 countries, we study total factor productivity (TFP) enhancers of utility and network services companies. We find that moving TFP closer to the technological frontier drives productivity growth at higher speeds in Asian countries than in European countries. We also find that financial leverage exerts a positive effect on TFP growth for larger infrastructure firms and that more financially developed countries utilize economies of scale through better use of financial resources. Large utility and transportation companies display a higher rate of TFP growth, indicating that a competition policy to encourage M&As would be prudent for the utility/transportation sectors to maximize economies of scale. In contrast, we find diseconomies of scale for energy companies in some countries. Moreover, young network firms improve TFP growth faster than their peers in countries with fewer product market regulations. Therefore, policies should remove entry barriers while facilitating the departure of old and low-productivity firms from network markets. Finally, policymakers should offer well-targeted fiscal incentives for intangible investments to boost TFP because the accumulation of intangible assets such as digital technology promotes more scale economies through network effects.