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Abstract:
This paper estimates the elasticity of substitution of an aggregate production function. The estimating equation is derived from the steady state of a neoclassical growth model. The data comes from the PWT in which different countries face different relative prices of the investment good and exhibit different investment-output ratios. Then, taking advantage of this variation we estimate the long-run elasticity of substitution. Using various estimation techniques, we find that the elasticity of substitution is 0.7, which is lower than the elasticity, 1, that is traditionally used in macro-development exercises. We show that this lower elasticity reinforces the power of the neoclassical model to explain income differences across countries as coming from differential distortions.

Demand for Investment, Dynamic Panel Data, Elasticity of Substitution

Abstract:
We explore entry into a foreign market with uncertain demand growth. A multinational can serve the foreign demand by two modes, or by a combination thereof: it can export its products, or it can create productive capacity via Foreign Direct Investment. The advantage of FDI is that it allows for lower marginal cost than exporting does. The disadvantage is that FDI is irreversible and, hence, entails the risk of creating underutilized capacity in the case that the market turns out to be small. The presence of demand uncertainty and irreversibility gives rise to an interior solution, where the multinational, under certain conditions, both exports its products and does FDI.

Foreign Direct Investment, Entry, Exports, New Markets

Abstract:
We explore entry into a foreign market with uncertain demand growth. Amultinational can serve the foreign demand in two ways, or by a combinationthereof: it can export its product, or it can create productive capacity viaforeign direct investment. The advantage of FDI is that it allows lower marginalcost than exports. The disadvantage is that FDI is irreversible and, hence,entails the risk of creating under-utilized capacity in case the market turns outto be smaller than expected. The presence of demand uncertainty andirreversibility gives rise to an interior solution, whereby the multinational does- under certain conditions - both exports and FDI. We argue that this featureis consistent with observed behaviour of multinationals, yet it has not arisen inprevious theoretical formulations.

Entry, exports, foreign direct investment, investment underuncertainty, new markets

Abstract:
We develop a model in which the value of a firm's reputation for quality increases gradually over time. In our model, a firm's ability to deliver high quality at any given period depends on how much it invests in quality. This investment is the firm's private information. Also, a firm's current quality is unobservable. Thus the only observable is a firm's past performance - the realized quality of the products it delivered. We assume that information about a firm's past performance diffuses only gradually in the market. Thus, the longer a firm has been delivering high-quality products, the larger the number of potential customers which are aware of it. We show that in equilibrium, the firm's investment in quality increases over time, as its reputation - the number of consumers who are aware of its history - increases. This is because the greater its reputation, the more it has to lose from tarnishing it by under-investing and, conversely, the more it has to gain from maintaining it. This is recognized by rational consumers. Therefore, older - and hence larger firms - command higher prices as quality premia. This in turn feeds back into firms' investment incentives: The fact that they are able to command higher prices motivates older and larger firms to invest still more. So the older and larger a firm is, the more valuable an asset its reputation is.

reputation, investment, quality, firm size, firm age

Abstract:
The increasing dependence of American households on debt financing and the rising rates of personal bankruptcy raise several welfare considerations that we analyze in this paper. We pose a theoretical model of relationship banking to first evaluate how strategic actions between banks and borrowers yield interest rates for various credit types and drive credit rationing in the market. Based on these results, we evaluate several policies that the government may implement to influence lending policies in consumer credit markets. We derive conditions under which the government optimally wishes to induce credit rationing and show that under some conditions, it is welfare enhancing to encourage banks to have a liberal lending policy, even if it means that interest rates are exceedingly high for low credit quality borrowers. Finally, we analyze the effects that a credit rating agency has on the dynamics of this market. Our theoretical analysis is consistent with empirical observations from these markets, and has significant importance especially given the recent subprime mortgage financial crisis.

Banking, Credit, Monetary Policy

Abstract:
We consider a repeated duopoly game where each firm privately chooses its investment in quality, and realized quality is a noisy indicator of the firm's investment. We focus on dynamic reputation equilibria, whereby consumers "discipline" a firm by switching to its rival in the case that the realized quality of its product is too low. This type of equilibrium is characterized by consumers' tolerance level - the level of product quality below which consumers switch to the rival firm - and firms' investment in quality. Given consumers' tolerance level, we determine when a dynamic equilibrium that gives higher welfare than the static equilibrium exists. We also derive comparative statics properties, and characterize a set of investment levels and, hence, payoffs that our equilibria sustain.

Reputation, consumer switching, moral hazard, repeated games

Abstract:
We develop a theoretical framework for comparing incentives, labor productivity and the allocation of effort in public versus private enterprises. We incorporate "socializing", an activity which yields utility for workers and affects a firm's output, into a multitask model of work organization. We establish the two following results. First, the optimal workers' compensation policy displays a larger incentive intensity in the private firm than in the public firm. Second, labor productivity in the private firm may be higher or lower than in the public firm. Both results fit well with the findings of empirical work.

Public Enterprise, Privatization, Incentive Schemes

Abstract:
We develop a theoretical framework for comparing the style of work in public and private enterprises. We incorporate "socializing", as an activity that yields utility for workers and affects a firm's output, into a simple multitask model of work organization. In contrast with previous models, we establish the two following results. First, the optimal workers? compensation policy displays a larger incentive intensity in the private firm than in the public firm. Second, labour productivity in the private firm may be higher or lower than in the public firm. Both results fit well with the findings of empirical work.

Incentive schemes, privatization, public enterprise

Abstract:
A striking characteristic of high-tech products is the rapid decrease of their quality-adjusted prices. Empirical studies show that the rate of decrease of QAPs is typically not constant over time; QAPs decrease rapidly at early stages of the product and then the rate of decrease tapers off. Studies also suggest that the QAP is positively correlated with the rate of product introductions: The faster new products are introduced, the faster is the rate of decrease in their QAPs. This paper presents a dynamic model of product innovations consistent with these empirical regularities.

Quality Adjusted Prices, Frequency of Innovations, Durable Goods, Obsolescence

Abstract:
We develop a model of firm size, based on the hypothesis that consumers are "locked in" because of search costs, with firms they have patronized in the past. As a consequence, older firms have a larger clientele and are able to extract higher profits. The equilibrium of this model yields: (i) A downward sloping density of firm sizes. (ii) Older firms are less likely to exit than younger firms. (iii) Larger firms spend more on R&D.

Consumer Inertia, Firm Growth, Industry Dynamics, R&D, Firm Size Distribution

Abstract:
Recording industry revenue has fallen sharply in the last three years, and some - but not all - observers attribute this to file sharing. We collect new data on albums obtained via purchase and downloading, as well as the consumers' valuations of these albums, among a sample of US college students in 2003. We provide new estimates of sales displacement induced by downloading using both OLS and an instrumental variables approach using access to broadband as a source of exogenous variation in downloading. Each album download reduces purchases by about 0.2 in our sample, although possibly much more. Our valuation data allow us to measure the effects of downloading on welfare as well as expenditure in a subsample of Penn undergraduates, and we find that downloading reduces their per capita expenditure (on hit albums released 1999-2003) from $126 to $100 but raises per capita consumer welfare by $70.

Abstract:
Using survey data on movie consumption by about 500 University of Pennsylvania undergraduate students, we ask whether unpaid consumption of movies displaces paid consumption. A variety of cross-sectional and longitudinal empirical approaches show large and statistically significant evidence of displacement. In the most appropriate empirical specification, we find that unpaid first consumption reduces paid consumption by about 1 unit. Unpaid second consumption has a smaller effect, about 0.20 units. Our analysis indicates that unpaid consumption, which makes up 5.2 per cent of movie viewing in our sample, reduced paid consumption in our sample by 3.5 per cent.

Abstract:
New information technology has reduced marginal production and distribution costs of information goods to negligible levels and promises to revolutionize many industries. Unpaid copies of digital products can be as good as paid first-generation copies, and their availability can undermine the ability of sellers to cover first-copy costs. As a result, unpaid distribution has emerged as a major issue facing the music and movie industries in the past few years. Using survey data on movie consumption by about 500 University of Pennsylvania college students, we ask whether unpaid consumption of movies displaces paid consumption. Employing a variety of cross-sectional and longitudinal empirical approaches, we find large and statistically significant evidence of displacement. In what we view as the most appropriate empirical specifications, we find that unpaid first consumption reduces paid consumption by about 1 unit. Unpaid second consumption has a smaller effect, about 0.20 units. These estimates indicate that unpaid consumption, which makes up 5.2 percent of movie viewing in our sample, reduced paid consumption in our sample by 3.5 percent.

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Abstract:
Machines are more expensive in poor countries, and the relation is pronounced. It is hard for a Solow (1956) type of model to explain the relation between machine prices and GDP given that in most countries equipment investment is under 10% of GDP. A stronger relation emerges in a Solow (1959) type of vintage model in which technology is embodied in machines.

Abstract:
No abstract is available for this paper.

Abstract:
We present a model of industry evolution where the dynamics are driven by a process of endogenous innovations followed by subsequent embodiments in physical capital. Our model stresses the causal relationship between past R&D expenditures and current investments in machinery and equipment. This causality pattern, supported by U.S. manufacturing data, also explains the observed higher volatility of physical investment relative to R&D expenditures.

Abstract:
The increasing dependence of individuals on debt financing raises several welfare considerations that we analyze in this paper. We develop a dynamic, competitive model of relationship banking to determine how regulation influences borrowing and lending behavior, and analyze how it affects welfare in the market. We characterize the lending regimes that arise based on public policy, and evaluate the optimal choice by the government to induce particular lending practices to arise. Finally, we consider the effect that a credit reporting agency has on the market. In the paper, we highlight the new empirical implications that the model generates.

G21

Abstract:
A model of gradual reputation formation through a process of continuous investment in product quality is developed. We assume that the ability to produce high-quality products requires continuous investment and that as a consequence of informational frictions, such as search costs, information about firms' past performance diffuses only gradually in the market. This leads to a dual process of growth of a firm's customer base and an increase in the firm's investment in quality. The model predicts, therefore, that the longer its tenure as a high-quality producer, the more a firm invests in quality. We relate this finding to empirical work on online commerce as well as on traditional industries.

Abstract:
We study the design of incentives in a firm in which cooperation among workers is important. Since cooperation is not observed, the firm is unable to reward workers for it. Workers may, nonetheless, cooperate because they derive direct utility from cooperation. This utility is endogenously determined and depends on how much others have cooperated in the past as well as on the firm's incentive intensity. Consequently, incentives are chosen with the aim of enhancing workers' utility from cooperation or of building "social capital." We show that the optimal choice of incentives can create cultural differences across firms.

Abstract:
We consider a durable-good monopolist that periodically introduces new models, each new model representing an improvement upon its predecessor. We show that if the monopolist is able neither to exercise planned obsolescence (i.e., artificially shorten the life of its products) nor to give discounts to repeat customers, the rate of product introductions is too slow - in comparison with the social optimum. On the other hand, if the monopolist is able to artificially shorten the durability of its products or to offer price discounts to repeat customers, it can raise its profit and, at the same time, implement the social optimum.

Abstract:
In this paper we examine the diffusion of a hardware/software system. For such systems there is interdependence between the hardware-adoption decisions of consumers and the supply decisions of software manufacturers. Hence there can be bottlenecks to the diffusion of the system. We consider the CD-industry and estimate the (direct) elasticity of adoption with respect to CD-player prices and the (cross) elasticity with respect to the variety of CD-titles. Our results show that the cross elasticity is significant. Our model can be used to quantify the effect of various policies aimed at speeding up the diffusion of a system.

Abstract:
In this paper we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984-1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model implies a U-shaped relationship between capital and risk-taking: As a bank's capital increases it first takes less risk, then more risk. A deposit insurance premium surcharge on undercapitalized banks induces them to take more risk. An increased capital requirement, whether flat or risk-based, tends to induce more risk-taking by ex-ante well-capitalized banks that comply with the new standard.

Abstract:
In this paper we examine the diffusion of a hardware/software system. For such systems there is interdependence between the hardware adoption decisions of consumers and the supply decisions of software manufacturers. Hence there can be bottlenecks to the diffusion of the system which stem not from high prices but from the fact that the complementary product is not available. We consider the CD-industry and estimate the (direct) elasticity of adoption with respect to CD prices and (the cross) elasticity with respect to the variety of CD-titles.

Our results show that the cross elasticity is indeed significant so that the presence of complementarities poses a serious bottleneck problem for the diffusion of the base product. We illustrate two applications of our methodology: (i) the business-policy question of how to subsidize a new base product which is contingent on a sufficiently large supply of complementary products, and (ii) the public-policy question of what are the benefits of imposing backward compatibility on a new technology (e.g., high definition televisions).

Abstract:
In this paper, we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984-1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model suggests that two aspects of the new regulatory environment may have unintended effects: higher capital requirements may lead to increased portfolio risk, and capital-based premia do not deter risk-taking by well-capitalized banks. On the other hand, risk-based capital standards may have favorable effects provided the requirements are stringent enough.