Optimal failure rates and penalty-bonus policies in the offshore petroleum sector

We characterize optimal time profiles of risk-reducing expenditures and wreck probabilities for petroleum platforms. The input to our analysis is the development of wreck cost, direct and imputed. Particular attention is paid to the question of how private companies deviating from socially optimal standards may be induced to comply with such standards by means of a) a time-variant penalty, b) a no-wreck bonus and c) a time-invariant penalty.     

Licensing and innovation with imperfect contract enforcement

Licensing promotes technology transfer and innovation, but enforcement of licensing contracts is often imperfect. We model contract enforcement as a game with perfect information but probabilistic enforcement and explore the implications of weak enforcement on the design of licensing contracts, the conduct of firms, and market performance. An upstream firm develops a technology that it can license to downstream firms using a fixed fee and a per‐unit royalty. Strictly positive per‐unit royalties maximize the licensor's profit if competition among licensees limits joint profits. With imperfect enforcement, the licensor lowers variable royalties to avoid cheating. Although imperfect contract enforcement reduces the profits of the licensor, weak enforcement lowers prices, increases downstream innovation, and in some circumstances can increase total economic welfare.     

THE NEW INSTITUTIONAL ECONOMICS – A DIFFERENT APPROACH TO ECONOMIC ANALYSIS

The initial objective of the paper is to describe the way in which the term ‘New Institutional Economics’ (NIE) emerged in the literature and became the designation for a new field concerned with the study of various analytical techniques designed for the exploration of institutional phenomena. It is then shown how some of the more important of these techniques, transaction‐cost economics, property‐rights analysis and contract theory, have been applied in two central lines of neoinstitutional thought – the Williamsonian and the Northian. Criticisms of these two disparate theoretical positions on the NIE are considered and assessed. Next, a brief review of some of the empirical literature is undertaken so that the explanatory powers of NIE themes can be gauged. Finally, the paper offers a few general remarks on the present state of the NIE and its possible influence on the further development of economics.     

R&D in markets with network externalities

This paper studies the consequences of network externalities on R&D rivalry between an incumbent firm and a potential entrant. In the model, all differences between the R&D projects chosen in market equilibrium and the socially best projects are solely due to network externalities. From a welfare perspective, the incumbent chooses a too risky and the entrant a too certain R&D project. Rothschild and Stiglitz's mean preserving spread criterion is used as a measure of risk. Adoption of a new standard is more likely in equilibrium than in the social optimum.     

Moving costs and the microeconomics of intra-urban mobility

This paper considers the role of moving costs in long-term optimal moving strategies from a theoretical microeconomic point of view. Using a model of intertemporal utility maximization, we arrive at conditions for (i) the optimal number of moves, (ii) the optimal moving dates, and (iii) the optimal consumption of housing services and other goods in the periods between moves. Also, comparative static results are obtained.     

HEURISTICS,THE NON‐MAXIMIZING FIRM AND EFFICIENT ALLOCATION

It has been suggested that the theory of the firm can be modified and improved by shifting to a (non‐maximizing) heuristic approach that is able to explain how relatively efficient outcomes can be brought about by the use of ‘fast and frugal’ decision rules. The paper argues, however, that certain heuristic mechanisms, which may have great appeal to entrepreneurs in practice, tend to lead firms to worse solutions than those that could be achieved in a neoinstitutional system with the use of other methods. Moreover, competition cannot be relied upon to eliminate such misallocation, and may even serve to promote the problem.     

Life‐Cycle Patterns of Interest‐Rate Mark‐Ups in Small‐Firm Finance*

We derive empirical implications from a theoretical model of bank–borrower relationships. The interest‐rate mark‐ups of banks are predicted to follow a life‐cycle pattern over the age of the borrowing firms. Because of endogenous bank monitoring by competing banks, borrowing firms initially face a low mark‐up, and thereafter an increasing mark‐up as a result of informational lock‐in, until it falls for older firms when the lock‐in is resolved. By applying a large sample of predominantly small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric‐information problems have a more pronounced life‐cycle pattern of interest‐rate mark‐ups. Additionally, we examine the effects of concentrated banking markets on interest‐rate mark‐ups. The results indicate that the life cycle of mark‐ups is mainly driven by asymmetric‐information problems and not by concentration. However, we find evidence that bank market concentration matters for older firms ? 2 Correction added after online publication on 20^th February 2012; the original text read ‘However, we find evidence that bank market concentration for older firms’, omitting the word ‘matters’.
     

Entrepreneurial Judgment,Decision Procedure and the Inevitable Emergence of the Non‐optimizing Firm in a Capitalist Economy

It has been argued that understanding of entrepreneurship and firm behavior can be advanced by generalizing the static theory of the neoclassical firm so that it can deal with conditions in a dynamic economy. The paper rejects generalization and explains why such a shift causes the nature of the allocation process to change from the neoclassical pattern. Under generalization, critical information becomes prohibitively costly to obtain and entrepreneurial judgment rather than the Pareto rules decides allocation. Thus, the non‐optimizing firm becomes dominant.     

Adolescent premarital childbearing: do economic incentives matter?

This paper develops and tests a three-stage nested logistic model of teenage childbearing that is influenced by economic incentives and costs created by US public policy. The modeling of teenage childbearing involves becoming pregnant, the choice to have an abortion or to bear the child, and the choice to bear the child premaritally or maritally. Data were obtained from a sample of 1718 Black and White women aged 14-16 years in 1979 from the National Longitudinal Survey of Youth. In 1990, the birth rate among unmarried youth was 29.5/1000 unmarried White women vs. 110.1/1000 unmarried Black women. In the sample, the pregnancy rate was 24% among White teenagers and 48% among Black teenagers. Miscarriages or stillbirths occurred among 11% of Whites and 12% of Blacks. Abortions were performed for 37% of Whites and 12% of Blacks. An incentive variable is the welfare guarantee. Cost variables include the cost of obtaining an abortion and the cost of obtaining contraceptive services and supplies. Access to family planning services is also accounted for in the model. Findings indicate that welfare, abortion, and family planning policy variables have a racially specific impact. For White teenagers, these variables have significant effects on pregnancy outcomes. For Black teenagers, the insignificance may reflect differences in sample size or important unmeasured racial differences in factors that influence fertility and marital behavior. The authors suggest that the rational choice perspective does not adequately explain premarital childbearing. It is also suggested that the specification of the variables on abortion, family planning, and adolescent sexual behavior may be fundamentally different and reflect differences in state attitudes and social customs. Only if the policy variables really change the costs of different pregnancy outcomes will changes in social policy change individual adolescent behavior. The authors state that focusing on only economic incentives did not rule out other influences on premarital childbearing.     

The socialist labor-managed firm and bank-financed investment: Some theoretical issues

Under a labor-managed system of the Yugoslav type of 1965–1971, the process of capital formation is subject to special difficulties, linked to the structure of property rights. Workers possess neither permanent nor transferable claims on capital assets but are, nevertheless, required by law to maintain the value of the firm's initial capital stock and of any additions to it. The law is intended to protect the nation's capital stock but is ill designed for this purpose. Its immediate effect is to reduce the collective's willingness to undertake bank-financed investment, and thus it promotes inefficient intertemporal allocation.