ALBERT

Notes: Many long-term contracts incorporate a termination clause. This paper argues that when agents have hidden information, such a clause has a beneficial incentive effect—it enables a principal to screen agents' private information at a lower cost. In a two-period model, this paper characterizes the optimal long-term contract with a termination clause, which specifies that the principal will switch agents in the second period when the first-period cost is high. The analysis delineates how the optimality of this clause depends on the intertemporal cost correlation structure, on the limits to agents' liability, and on the principal's degree of commitment.

Notes: Takeovers give raiders the opportunity of breaking implicit contracts inside the firm. If implicit contracts are adopted by workers and management to reach more efficient outcomes, then the possibility of takeovers may cause a welfare loss. We show that, under some conditions, this argument can go through even if the firm and the workers can write explicit and complete contracts. The crucial assumption is that the profitability of the firm is linked to its financial situation, in the sense that a firm which has a high probability of bankruptcy will face fewer opportunities than a financially solid firm. In this framework, the possibility of takeovers imposes constraints on the set of feasible employment contracts, leading to inefficient outcomes.

Notes: This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long-term incentive contracts with managers or short-term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long-term contract makes a firm a leader in incentives, while a short-term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long-term contract and the other firm short-term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long-term incentive contracts.

Notes: Why is it so common for the seller to provide guarantees that say “Satisfaction guaranteed or your money back” along with the sale of a product? Newly introduced goods and mail-ordered products are usually sold with such guarantees. In honoring money-back guarantees, why is it a common business practice to pay back exactly the purchase price rather than a portion of it? In this paper we study the informational role and optimality of the common business practice of money-back guarantees in a signaling model with quality uncertainty and risk-neutral buyers. We find that money-back guarantees and price together completely reveal a monopoly firm's private information about product quality, Moreover, the private information is revealed at no signaling cost. Furthermore, we show that in terms of the level of monetary compensation specified by a guarantee, price is the profit-maximizing level of monetary payback in case of product failure.

Notes: Manufacturers may intentionally damage a portion of their goods in order to price discriminate. Many instances of this phenomenon are observed. It may result in a Pareto improvement.

Notes: It is generally believed that industries with greater product differentiation have higher rates of return. This paper shows that this effect breaks down in the presence of firm-specific cost shocks. Greater substitutability in products generates two opposing effects: (1) it allows a larger increase in demand when a firm has a favorable cost shock, which more than compensates for the reduction in demand when it has an unfavorable cost shock, and (2) it results in more intense price competition. These two countervailing forces result in industry profit being highest in markets with a moderate degree of product differentiation.

Notes: 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. Traditionally, the only distinction between R&D and physical investment was one of labeling: the first process accumulates an intangible stock, knowledge, while the second accumulates physical capital. Both stocks affect output in a symmetric fashion. We argue that the story is not that simple, and that there is more to it than differences in the object of accumulation. Our model stresses the causal relationship between past R&D expenditures and current investments in machinery and equipment. This causality pattern, which is supported by the data, also explains the observed higher volatility of physical investment relative to that of R&D expenditures.

Notes: We examine the question of whether a regulated firm that makes a long-term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market. We show that necessary conditions for a separating equilibrium in which the magnitude of investment signals high future demand may include a low degree of managerial myopia, large variability of future demand, a lenient regulatory climate, and low sunk cost. Our model suggests that in estimating valuation models of regulated firms it is important to separate firms into two groups: firms for which a separating equilibrium is likely to obtain and firms for which the equilibrium is likely to be pooling. The market value of a firm in the first group is positively correlated with its level of investment, but uncorrelated with the level of actual demand, whereas for the second group the opposite holds.

Notes: This paper develops the hypothesis that firms possess a stock of well-established brands, a stock termed brand capital. The firm with the greatest capital is able to introduce new products in response to new information about consumer tastes before rivals. The results using data from the ready-to-eat cereal industry not only support this hypothesis, but also distinguish brand capital from other sources of firm heterogeneity.

Notes: This paper attacks the problem of developing strategies for a firm to deal with technological change. We show that the product market strategies of the firm—including pricing, product positioning, and rent preemption strategies—can play a role in the efficient search for technology-related information when information search is costly and there are adaptation costs due to the presence of agency. We utilize a dynamic model of spatial competition with uncertain technological innovations in which firms can learn from each other about technological developments. Private information and agency conflicts are shown to increase the effective information search costs of incumbents, who then use interfirm learning to their advantage in equilibrium. This viewpoint also allows us to see the role of mergers and acquisitions, subsidiary formation, and internal R&D labs in a new light. The more general point is that organizational structures and, in particular, the differential distribution of information within the organization impose constraints on the information-search and adaptation strategies of the firm, and the formulation of product-market and R&D strategies serves to relax these constraints.

Notes: We consider the general problem of price discrimination with nonlinear pricing in an oligopoly setting where firms are spatially differentiated. We characterize the nature of optimal pricing schedules, which in turn depends importantly upon the type of private information the customer possesses–either horizontal uncertainty regarding brand preference or vertical uncertainty regarding quality preference. We show that as competition increases, the resulting quality distortions decrease, as well as price and quality dispersions. Additionally, we indicate conditions under which price discrimination may raise social welfare by increasing consumer surplus through encouraging greater entry.

Notes: We model an internal labor market in which employee behavior and compensation are affected by the firm's financial position and the threat of hostile takeover or other exercise of shareholder “voice.” We show how good past performance can result in excessively generous promotion and pay decisions. While the threat of shareholder activism will remove this “slack,” activists optimally face a positive cost barrier, which in turn varies across firms. The cost barrier is higher when cooperation or “helping” between employees is more important, and is lower when employees receive efficiency wages due to an inability to “pay” for their jobs. Since the importance of helping is associated with pay compression and “flat” pay ladders, such firms should also exhibit a greater degree of management entrenchment.

Notes: The literature on the incentives for R & D cooperation with spillovers typically deals only with the factors affecting cooperative profits. This paper focuses on the incentives to cheat and the stability of such cooperative agreements in a repeated game framework. It is shown that the stability of cooperation is influenced by the nature and magnitude of spillovers, relative to the nature and degree of product market competition. While cooperative profits are higher with large positive (exogenous, unintended) know-how spillovers, such as in fundamental research, our anslysis shows that it may be easier to sustain cooperation in areas with lower spillovers, such as applied research, because of the smaller incenfives to cheat on the initial agreement, at least when firms produce substitutes. Alternatively, the possibility of technology sharing (i.e., intended or endogenous spillovers), besides R&D coordination, not only increases cooperative profits but also reduces the incentives to defect from a cooperative equilibrium.

Notes: In a moral hazard setting, we model the fact that the agent may get private signals about the final outcome of his effort before the public realization of this outcome. Actions affect both the distribution of the outcome and the quality of the agent's private information. We compare simple contracts, based on output only, with revelation contracts, based on output and messages about signals. Revelation contracts give the agent some discretionary power during the course of the relationship; they are optimal if and only if lowering effort does not increase the quality of private information in the sense of Blackwell (1953). In the context of managerial compensation schemes, the revelation contracts we analyze can be viewed as allowing the agent to exercise an option on the final profits before the realization of these profits. The theory thus provides an alternative justification of the widespread use of stock options in managerial compensation schemes, as opposed to compensation schemes that rely only on salary, bonus, and (restricted) stock plans.

Notes: Analysis of seven wholesale and retail markets for long-distance telephone services since the AT & T divestiture indicates that service provider concentration declined in the later 1980s and then stabilized in the 2990–1993 period. In addition to this stability in market shares, a number of other conditions established since 1990 have been conducive to the development of market sharing rather than significant price competition. The most important of these conditions has been the tarifing process of the Federal Communications Commission by which MCI and Sprint replicate ATGT's price announcements. As market shares stabilized and became more equal, and as regulation formalized the price-setting process, the price-cost margins of the three large carriers increased and became more nearly identical. These results are consistent not with price competition but rather with emerging tacit collusion among AT&T, MCI, and Sprint.

Notes: The Federal Communications Commission held its first auction of radio spectrum at the Nationwide Narrowband PCS Auction in July 1994. The simultaneous multiple-round auction, which lasted five days, was an ascending bid auction in which all licenses were offered simultaneously. This paper describes the auction rules and how bidders prepared for the auction. The full history of bidding is presented. Several questions for auction theory are discussed. In the end, the government collected $617 million for ten licenses. The auction was viewed by all as a huge success an excellent example of bringing economic theory to bear on practical problems of allocating scarce resources.

Notes: This study examines the investment patterns of all large local exchange telephone companies in the United States over time. It identifies how different regulatoy environments have influenced the recent historical pattern of investment in modern infrastructure equipment. It focuses exclusively on the postdivestiture experience of local telephone exchange companies (LECs). It examines the growth of fiber-optic deployment and of complementary equipment associated with the modernization of today's information infrastructure. The study estimates the influence of different regulatory structures on infrastructure deployment by LECs. The study is unique in that if relates individual LEC investment patterns to LEC-specific regulatory, demographic, and economic characteristics. Thus, it isolates the contribution of state regulatory policies from that of other demographic and economic factors in the determination of infrastructure deployment at the state LEC rather than at the corporate level. Its main findings are as follows: First, price regulation (and, in particular, price caps) is a more potent regulatory mechanism than the standard earnings sharing scheme. Second, when associated with an earnings sharing scheme, price regulation is less effective in triggering infrastructure deployment than when it is implemented by itself. These results raise questions about the effectiveness of a popular regulatory instrument-earnings sharing schemes-and highlight the effectiveness of generic price-cap regulation. These results have implications for the design of regulatory policy at both the state and federal levels. In particular, given the importance currently being placed on the development of the information superhighway, regulatory emphasis should be focused more on price regulation than on regulating profits.

Notes: The House and Senate of the United States Congress recently passed legislation that directs the FCC to establish a system for using auctions to allocate the use of radio spectrum for personal communications services. There is a unique and unprecedented set of issues that arise in this context, which are of interest to economists, industry analysts, regulators, and policymakers. We discuss these issues and evaluate their likely impact on the outcome of the spectrum auctions. In addition, we argue that there may be pitfalls in the auction procedure adopted by the FCC, and we discuss possible alternative procedures.

Notes: Royalty payments from a franchisee to a franchisor serve as incentive for the franchisor to provide appropriate levels of quality and brand, name investment. However, since they also distort the service provided by the franchisee, we should expect relatively lower royalty rates in franchises that are primarily service-oriented. Casual examination of royalty rates across product-oriented and service-oriented franchises shows that the opposite is true, with service-type franchises enjoying higher royalty rates. We resolve this apparent puzzle. The basic argument we put forth is that in product-type franchises, a franchisor can charge a wholesale price on goods transferred to the franchisee, thus using an alternative instrument that also serves as an incentive for the franchisor. Moreover, in general, a franchisor will use both wholesale price and royalty to minimize distortions in retail price and service at the retail level. We then test the predictions of our model on different industries and find confirmation for the same.

Notes: We examine the nature of incentive schemes between the principal and the risk-neutral agent in the presence of the agent's limited liability and ex ante action choice. We consider alternative schemes when a simple rental contract is infeasible due to the limited liability of the agent and study the effectiveness of a performance bonus scheme in achieving the first-best outcome. We also discuss some implications of such schemes in real practices.

Notes: Recent theories of vertical integration based on incomplete contracts assume perfect competition on at least one side of the market. As a result, the make-or-buy choice has no redistributive effect and will reflect efficiency considerations only. This paper introduces imperfect competition into an otherwise standard model of a vertical relationship with noncontractable specific investments. We assume that there are a finite number of potential input suppliers with private information about their costs. We first show that a monopoly buyer of such inputs will often prefer to own the seller's assets even though it would be more efficient for the seller's assets not to be so owned. We then show that an increase in the number of potential partners on either side of the market reduces this inclination towards vertical integration. With perfect competition on either side of the market, the make-buy decision will reflect only efficiency considerations.

Notes: The paper studies managerial incentives in a model where managers choose product market strategies and make takeover decisions. The equilibrium contract includes an incentive to increase the firm's sales, under either quantity or price Competition. This result contrasts with previous findings in the literature, and hinges on the fact that when managers are more aggressive, rival firms earn lower profits and thus are willing to sell out at a lower price. However, as a side effect of such a contract, the manager might undertake unprofitable takeovers.

Notes: For U.S. futures exchanges, controlling costs while maintaining market performance is an ongoing, difficult challenge. New market realities have made that challenge even more daunting in recent years as costs have escalated, competition has expanded, and the role of information technology has expanded. It is always difficult for regulatory statutes to keep pace with ever-changing markets. Futures markets are no exception. The basic statutory framework represented by the Commodity Exchange Act (CEA) was enacted in 1922, over seventy years ago. In order to maintain appropriate regulatory balance, periodic review and reform has been essential over the years. Our current federal regulatory systems were built for different markets with different competitive realities than we face today. Reforming the CEA to take into account those new market realities is vital to the survival of U.S. futures exchanges.

Notes: We develop a game-theoretic version of the right-to-manage model of firm-level bargaining where strategic interactions among firms are explicitly recognized. Our main aim is to investigate how equilibrium wages and employment react to changes in various labor and product market variables. We show that our comparative statics results hinge crucially on the strategic nature of the game, which in turn is determined by the relative bargaining power of unions and managers.

Notes: We develop a simple model in which there is both interfirm (or intraproduct) and intrafirm (or interproduct) competition. The purpose is to develop a classificatoy framework in order to understand product-range or diversification decisions alongside conventional competition. The equilibrium outcomes commonly involve a limited range of the available goods being produced. Deterrence equilibria and other strategic actions are also examined.

Notes: DeGraba and Postlewaite (1992) show that the seller of a durable input can solve the time inconsistency problem by offering most-favored-customer (MFC) protection to buyers. McAfee and Schwartz (1994) show that if a supplier sells inputs to competing firms using two-part tariffs, MFC protection that allows a firm to replace its contract with a contract executed by any other firm will not solve the commitment problem, and argue this implies managers cannot use MFCs as a strategic commitment device in complex contracting situations. This paper shows that if the profits of the seller and the buyers are monotonic in each term of the contract, then applying MFC protection to each term of a contract allows a manager to solve his commitment problem in complex contacting situations. We show that “standard” contract arrangements (two-part tariffs, declining block tariffs, and royalties as a percentage of sales) meet this condition.

Notes: This paper interprets private label marketing as a retailer instrument for overcoming the double-marginalization problem inherent in the distribution of well-known manufacturer brands. Retailers with some degree of market power carry private label substitutes for popular national brands in order to capture more profit from the vertical structures they share with brand manufacturers. The net effect of private label marketing is to improve the performance of distribution channels. After presenting a formal model and deriving analytical results, the paper gathers some empirical evidence that supports these results.

Notes: This paper studies the hypothesis that large firms have more bargaining power with suppliers than do small firms, using data from the cable television industry. Employing techniques from the “new empirical lo,” the effect of owner size on marginal costs is inferred from the effect of owner size on observable product market choices. In the cable industry, the downstream firms decide how many subscriptions of cable to sell and how many channels to offer in the cable package. lf large firms have lower costs than small firms, then large firms should be willing to supply more than small firms, at all prices. The effects of bargaining power are identified separately from the effects of scale economies by exploiting the structure of the cable industry. Scale economies, in the cable industry, are likely to stem from regional size, while bargaining power is likely to stem from national size. By controlling for regional size, estimates of the effect of owner national size on the willingness to supply cable subscriptions and to offer channels indicate that large downstream firms offer significantly more subscriptions and channels at all prices than do small downstream firms. These results provide some of the first systematic, industry-specific, evidence consistent with the bargaining-power hypothesis.

Notes: The role of product warranty in segmentation of consumer durable product markets is highlighted. I demonstrate that consumer moral hazard and heterogeneity in product usage create variation in the valuation of product warranties by the different segments in the market. In this context, the firm, by offering a self-selecting menu of base warranty and extended warranties, satisfies the warranty demands of the various segments of the population. The consumer choice behavior prediction of the theory with regard to extended warranty is empirically validated with data from a survey of new car buyers.

Notes: Research on durable goods has shown that because of a time inconsistency problem, a monopolist manufacturer prefers to rent rather than sell its product. We reexamine the relative profitability of renting versus selling from a marketing perspective. In particular, using a simple linear demand formulation, we assume a durable goods monopolist has to use downstream intermediaries to market its product. In contrast to the case of an integrated monopolist, we find that when the monopolist has to rely on intermediaries, then it prefers to go through an intermediary that sells rather than one that rents its product. Similarly, the intermediary that sells the product is more profitable than the intermediary that rents the product. However, if the monopolist can commit to a set of prices, then the intermediary that rents is more profitable than the intermediary that sells.

Notes: Empirically validating and testing the specification of game theoretic models has received limited attention in the marketing literature. The authors provide an econometric framework for estimating the parameters of response functions when the observed data in the market place are the Nash equilibrium outcomes of an underlying dynamic duopoly game specification. Specifically, the estimation procedure accounts for the joint endogeneity of market shares and marketing efforts of market rivals using a system of simultaneous equations that included the market response function and the Nash equilibrium conditions. A formal statistical test is used to detect model misspecification. The empirical analysis is carried out using data from four product markets: pharmaceutical, soft drink, beer, and detergent. Comparisons are provided with conventional estimation of the response function parameters in which the equilibrium conditions are ignored in the estimation. Managerial implications of the empirical results are discussed.

Notes: This paper develops a theory of capital structure based on the attempts of a firm to alleviate a holdup problem that arises in its bilateral relationship with a buyer. It is shown that by issuing debt to outsiders, the firm can improve its ex post bargaining position vis-a-vis the buyer and capture a larger share of the ex post gains from trade. Debt, however, is costly because the buyer may find the required price too high and refuse to trade. Since debt raises the payoff of claimholders, it strengthens the firm's incentive to make relationship-specific investments, and therefore alleviates the well-known underinvestment problem. A comparative static analysis yields a number of testable hypotheses regarding the firm's financial strategy.

Notes: Whether vertical integration between a downstream oligopolist and an upstream oligopolist is profitable for an integrated pair of firms is shown to depend on whether one means by this that profits increase no matter what other firms do, that all integrated firms are better off when all firms are integrated than when none are, or simply that no downstream-upstream pair of firms has an incentive to deviate from a situation where all firms are integrated. It is also shown to depend on the number of firms in each oligopoly and on the type of interaction that is assumed between firms that are integrated and firms that are not. In particular, it is shown that if no restriction is put on trade between integrated and nonintegrated firms, integrated firms may continue to purchase inputs from the nonintegrated upstream firms, with the goal of raising their downstream rivals' costs. Furthermore, even though firms are identical, asymmetric equilibria, where integrated and nonintegrated firms coexist, may actually arise as an outcome of the integration game.

Notes: This paper considers the incentives of a firm with power in a market for one good to tie in the sale of a complementary good even though the complementary good is produced in a zero profit market. If the zero-profit price of the tied good is greater than the marginal cost (which occurs for example when the technology is characterized by a fixed cost and a constant marginal cost), a firm will fie in order to increase the sales of the complementary good, which at the margin is profitable. We show that such tying will lower the effective prices paid by customers and increase welfare. This incentive exists if the firm with market power is a monopolist or one of several competing oligopolists.

Notes: This paper examines the effect of a middleman on the search and trading behavior of the traders. It is shown that the buyer and seller types with middle valuations choose to search for each other, while the buyer and seller types with high or low valuations drop out of the search market and choose to trade directly with the middleman. The ask and bid prices of the middleman act as an outside option for the buyer and seller, and influence the outcome of the bargaining between the two. The model generalizes Gehrig (1993) by endogenizing the traders' search intensities, by allowing the traders to go to an intermediary even if thy have engaged in search, and by enabling the intermediary to provide the service of immediacy.

Notes: This paper discusses the supplier power of medical specialists. We argue that a combination of factors, including the structure of health care delivery, reimbursement systems, the presence of option demand, and high consumer switching costs, create circumstances in which medical specialists may be able to exercise significant seller power. We explore the implications of this for the pricing and organization of medical care.

Notes: This paper offers an exact definition of the value created by firms together with their suppliers and buyers. The “added value” of a firm is similarly defined, and shown under certain conditions to impose an upper bound on how much value the firm can capture. The key to a firm's achieving a positive added value is the existence of asymmetries between the firm and other firms. The paper identifies four routes (“value-based” strategies) that lead to the creation of such asymmetries. Our analysis reveals the equal importance of a firm's supplier and buyer relations. Cooperative game theory provides the underpinnings of the analysis.

Notes: The recent emergence of total quality management (TQM) in the U.S. has spawned a great deal of interest in management circles as well as in the mass media. However, despite the growing number of firms that have adopted this management technique, few formal tests exist concerning the pattern of adoption as well as the changes that accompany the adoption of TQM. This paper contrasts models of production for TQM and non-TQM firms in order to explore reasons why some firms but not others have adopted the TQM approach to quality improvement. Predictions arising from such a comparison are tested using a unique data set that combines data on firms from three different sources. Our findings tend to support the proposed theory of systematic differences between firms that find it advantageous to adopt TQM and firms that do not. We also find evidence that firms adopting TQM experience greater growth in sales, employment, and capital stock.

Notes: Private information creates a cost of operating a hierarchy, which becomes larger as the hierarchical distance between the information source and the decision maker increases. When information about a firm's capabilities is dispersed among the individuals in the firm, production is inefficient even though everyone behaves rationally. Because hierarchies need rents in order to function, a firm with a long hierarchy may not be viable in a competitive industry.

Notes: A dynamic model of product rivalry is developed for a market in which firms choose price and advertising intensity. The model, a state-space game, is implemented using data that consist of weekly price, sales, and promotional activity for four brands of saltine crackers sold by four chains of grocery stores in a small town. A number of questions can be asked of this data. First, is advertising predatory (merely changing market shares) or cooperative (shifting out market demand)? Second, are price and advertising own and cross-strategic complements or substitutes? And finally, do investments in stocks of goodwill and in price reductions make firms tough and aggressive or soft and accommodating?

Notes: Why are moving sales a successful and widespread phenomenon? How can it be optimal for a seller to disclose her low valuation for the item to be sold? We propose an explanation based on the “lemons problem” in bargaining with asymmetric information about quality. Disclosing a low valuation signals that there are significant gains from trade, so that trade takes place when it wouldn't otherwise, and all agents are made better off.

Notes: I present tests of a competitive rationale for price promotions. In a model with a population of informed and uninformed customers, price competition yields a static equilibrium in which each seller draws a price from a specified density function. Price data on coffee and saltine crackers products are used to test whether the sample of prices on each product could have possibly come from the theoretically specified density function. The results suggest that some markets are indeed consistent with the marginal distributions of prices predicted by the model. Furthermore, in the process of testing this rationale for price promotions, estimates are obtained for the marginal cost of each product, the number of competing goods, and the percentage of informed consumers. The resulting excess variability of these estimates across competing brands can also raise questions with respect to the empirical validity of the model.

Notes: We investigate why different states in the United States choose different regulatory plans in their telecommunications industry. We present a simple theoretical model and an empirical analysis of the issue. We find that a state is more likely to replace rate-of-return regulation with incentive regulation when: (1) residential basic local service rates have historically been relatively high; (2) allowed earnings under rate-of-return regulation in the state have been either particularly high or particularly low; (3) the state's leaders tend to come from both major political parties, rather than from a single party; (4) the state's urban population is growing relatively rapidly; and (5) the bypass activity of competitors in the state is less pronounced.

Notes: Duopolistic interaction between a small firm and a large established firm is considered and compared to guerrilla warfare, The paper investigates a “hit and run” equilibrium in which the small firm enters the market, stays there for several periods, exits, stays out for several periods, and then reenters. Occasionally there may be a price war (or retaliation), but the small firm may also exit voluntarily, thereby avoiding possible confrontation. The amount of time that the small firm stays in the market and the timing of the price wars do not follow any predictable pattern, which is part of the mixed strategies that both firms play in equilibrium.

Notes: After the initial breakthrough in the research phase of R&D, a new product undergoes a process of change, improvement, and adaptation to market conditions. We model the strategic behavior of firms in this development phase. We emphasize that a key dimension to this competition is the innovation that leads to product differentiation and quality improvement. In a duopoly model with a single adoption choice, we derive endogenously the level and diversity of product innovations. We demonstrate the existence of equilibria in which one firm enters early with a low-quality product while the other continues to develop the technology and eventually markets a high-quality good. In such an equilibrium, no monopoly rent is dissipated and the later innovator makes more profits. Incumbent firms may well be the early innovators, contrary to the predictions of the “incumbency inertia” hypothesis.

Notes: This paper addresses the strategic commitment value of various price and nonprice vertical contracts. Assuming contract offers are sufficiently public to have strategic importance, we focus on commitment as a necessary and separable condition to be met. The analysis has two components. First, considering the relationship between a monopolist manufacturer and his imperfectly competing retailers, enforcement conditions necessary for alternative vertical contracts to have commitment value are identified in the static (reputation-free) context. It is shown that external help (i.e., enforcement by nonsignatories) is necessary for bilateral minimum resale price maintenance (price floors) and exclusive territory contracts to have commitment value, whereas maximum resale price maintenance (price ceilings) do not require such help (i.e., they are internally enforcing). Second, the paper provides an analysis of the U.S. case law and discusses the empirical validity of the “external enforcement” assumption that is shown to underlie recent proposals to make certain vertical restraints illegal.

Notes: Few economic relationships have been as scrutinized as that between SNA measures of national product, investment and consumption, and welfare. The present paper contrasts SNA economic production and welfare to total production and welfare within the Walrasian framework of usefulness and costliness. An evaluation of deductions and additions to the SNA made by Nordhaus-Tobin, Zolotas, Richard and Nancy Ruggles, Kendrick, Eisner and Jorgenson-Fraumeni, in their research on extended product and income accounts and improved indicators of welfare reveals numerous unresolved analytical and measurement issues; and reaffirms the usefulness of the SNA as a fundamental, initial, welfare indicator.

Notes: Data from the International Comparison Programme (ICP) generate a number of analyses examining price and quantity relationships across countries. Although geographic location is sometimes evoked to explain differences across observations, it is seldom used to measure the extent of this interrelationship. Using ICP Phase V benchmark studies (Summers and Heston, 1991) at the level of household consumption for approximately 64 countries and 23 aggregate headings in 1985, this paper introduces such a measure, testing for spatial autocorrelation among price relatives with respect to three different measures of relative location: the pairwise existence of a common boundary, the distance between capital cities and the amount of trade between two countries.

Notes: This paper examines issues involved in calculating a value added index in order to measure real value added at the industry level. Three methods of calculating real value added are considered; the Laspeyres double-deflation method recommended by the United Nations System of Nation Accounts, the commonly used single-deflation method, and the double-deflation Divisia method. Actual data are employed to clarify and illustrate the issues involved, and the paper concludes with a recommendation for an appropriate index to use when calculating industry real value added.

Notes: The National Accounting Matrix including Environmental Accounts (NAMEA) shows environmental burdens that are consistent with the economic figures in the national accounts. In the NAMEA, the existing national accounts matrix has been extended with accounts in physical units. On the basis of the expected contribution of each polluting substance to a particular environmental problem, emissions are converted to theme equivalents. This results in six summary environmental indicators that are directly comparable to the conventional economic aggregates. In addition, this meso-level information system can be used as the core data framework for integrated analyses and forecasts of economic and environmental changes.

Notes: This paper analyzes how inequality in Before and After Government income has changed in Germany since reunification using the 1990 through 1992 waves of the German Socio-Economic Panel. A Theil decomposable inequality index is used to measure inequality in Germany and in its eastern and western states. Massive public transfers from west to east have narrowed the east-west income gap, substantially offset the rise in income inequality from private sources, and lowered overall inequality in the western states. The net result of this policy has been a drop in After Government income inequality in Germany between 1990 and 1992.

Notes: The paper concerns the links between labour force accounts and national accounts. It first discusses the variation in the perception of labour force among countries which results in much disparity in recorded participation rates. This obviously makes international comparison difficult. Since benchmark labour force information is often tied to population censuses which are infrequent and vary in concepts and approaches, even comparisons within a country over time are difficult. Finally a discussion of the use of labour force data to estimate the unrecorded economy is followed by suggestions on the direction for future work.

Notes: Four alternative measures of the average duration of unemployment are examined with the intention of illustrating: (1) the biases inherent in the average incomplete duration of unemployment, a statistic that is often the only one reported by many statistical agencies; and (2) the robustness of the average complete duration of unemployment to a host of assumptions underlying its derivation by non-parametric methods. Canadian data are employed, but the results offer a guide to the construction of the average complete duration of unemployment that may have broader applications.

Notes: The transformation of a non-market to a market economy ought to change fundamentally the significance of money incomes for welfare. Whereas in a stressful non-market economy such as the former Soviet Union, non-monetized resources could substitute for money income and promote welfare, in a modern market economy money income should be a good proxy for household welfare. This article tests the extent to which Russians are now in a modern market economy by analyzing data from nationwide Russian surveys in January, 1992, and April, 1994. Modern influences are increasingly important as a determinant of the distribution of money incomes, but not as an influence upon household welfare. The “randomness” of temporary disruptions of welfare is in accord with Rawlsian principles of equity.

Notes: Using longitudinal data, 1 estimate the impact of redistribution on the welfare cost of income risk in Germany and the United States. The estimates account fully for behavior because individuals in each country have responded optimally to that country's policy. The results indicate that the welfare cost of income risk is 5.4 percent of disposable income in Germany, 8.5 percent in the U.S. Redistribution has reduced these risks from their pre-tax, pre-transfer levels by 43 percent in Germany, 21 percent in the U.S. The political importance of income security is evident in both countries, as risk relief often eliminates the net burden of redistributive taxes among middle-class households. The conclusions are robust across several models of income expectations.

Notes: The 1993 System of National Accounts is a remarkable document, but the System also has some major imbalances and omissions. The present paper spells out four aspects of the SNA that require further development: (1) accounting for the costs of economic change; (2) delineation of information as an economic commodity; (3) overhaul of the methodology underlying input-output accounts; and, (4) consequences of the System's implicit use of compacted accounting. These developments can be incorporated in a Supplementary Document in the near future. We need not wait 25 years.

Notes: Economic Council of Canada, Employment in the Service SectorDelaunay, Jean-Claude, and Jean Gadrey, Services in Economic Thought: Three Centuries of DebateGriliches, Zvi (ed.), Output Measurement in the Service Sectors

Notes: On average, poverty and income inequality increased in Latin America during the 1980s. Forty-six percent of the increase in poverty took place in the cities of Brazil alone, though part of this reflects the migration of poor rural inhabitants to urban areas. There is strong evidence that both income inequality and poverty mirrored the economic cycle, rising during recession and falling during recovery. Economies that grew (e.g. Colombia, Costa Rica) performed better with respect to poverty and income inequality than those that stagnated. In particular, countries that failed to stabilize effectively (e.g. Brazil, Peru) experienced substantial increases in poverty. Educational attainment has the greatest correlation with both income inequality and the probability of being poor. From a policy standpoint, there is a clear association between the provision of education, lessening of income inequality, and poverty reduction.

Notes: Health problems and physical and mental impairments can restrict the kind and amount of work that individuals can perform. Several studies have estimated the loss in earnings experienced by disabled/health-limited workers, but they do not examine the trend in this loss over time. The authors propose an alternative indicator of productivity loss that is more appropriate for inter temporal comparisons: “lost earnings capability”–the difference between the amount of money persons could potentially earn if they were free of disability/health limitations and the amount of money that they can actually earn given their limitations. The estimates indicate that the mean lost earnings capability per disabled/health-limited person grew over the period from 1973 to 1988, while the population with disabilities/health limitations fell. In 1973, lost earnings capacity totaled about 5.3 percent of Gross National Product (GNP); by 1988, the loss had fallen to about 4.5 percent of GNP as a consequence of the reduction in the number of people with limitations. Data are from the Current Population Surveys and the Survey of Income and Program Participation.

Notes: Review Article on Industrial Efficiency in Six Nations

Notes: From 1980 to 1990 Portugal experienced a generalized liberalization of economic activity, due in large part to its 1986 integration in the European Union. This paper studies the changes in the Portuguese distribution of household income and expenditure during this period, using micro-data on household budgets and applying recent developments in statistical inference for Lorenz curves. We find a significant increase in six measures of welfare and an unambiguous decrease in the inequality of the respective distributions. Different explanations for the findings of decreased inequality are discussed.

Notes: Richard Burkhauser and Dallas Salisbury (Eds.), Pensions in a Changing EconomyJohn Williamson and Fred Pampel, Old Age in Comparative Perspective

Notes: Using data from the German Socio-Economic Panel, we compare income mobility of persons from the eastern and western states of Germany between 1990 and 1995. We consider income mobility between consecutive years and between the first and the final year of this time period. We find that gross individual labor income mobility was much higher in the east than in the west during the first years after reunification, but that this difference has become much smaller until 1995. Changing to measures that reflect economic well-being more accurately, we observe that gross equivalent labor income mobility and net equivalent income mobility initially were also much higher in the eastern states than in the western states, but converged over time as well. This convergence has been particularly strong for net equivalent income mobility, suggesting that the social protection system has greatly reduced mobility risks associated with the transformation process in the eastern states of Germany.

Notes: The precautionary saving literature shows that income uncertainty increases savings and wealth. To estimate the magnitude of this effect, we need a measure of income uncertainty. This paper empirically analyzes subjective income uncertainty in The Netherlands. Data come from a large Dutch household survey. We measure income uncertainty by asking questions on expected household income in the next twelve months. First, we describe the data and investigate the relationship between the measure of income uncertainty and a number of household characteristics. Controlling for information on expected income changes, we find strong relationships between labor-market characteristics and the subjective income uncertainty as reported by the heads of the households. Second, we compare income uncertainty in The Netherlands with income uncertainty in the U.S. and Italy. It becomes evident that perceived income uncertainty is smaller in The Netherlands than it is in the U.S.

Notes: Precautionary savings models suggest that wealth should rise with income risk. Risk is reduced by means-tested transfers, however, which implies that transfer programs should discourage private wealth accumulation. We offer a comprehensive empirical assessment based on variation across states in the generosity of a number of programs, specifically unemployment insurance and means-tested transfers (Aid to Families with Dependent Children and Food Stamps). We use monthly data on married couples from the Survey of Income and Program Participation (SIPP) to regress wealth on income, income risk, and various measures of transfer generosity. The results support the precaution-ary savings model and reveal moderate negative wealth effects of both unemployment insurance and means-tested transfers, with an elasticity of about −0.18.

Notes: The first set of hours of work estimates constructed for Canada and its regions for the 1880–1930 period is presented in this article. These estimates suggest a trend decline in hours of work, especially following First World War. In addition, these estimates suggest that the decline in hours of work came at no or little cost in terms of real weekly income. The trends uncovered for Canada are found to be similar to those revealed for the U.S. In effect, by the early twentieth century workers were realizing their long expressed preferences for a shorter workweek at no loss in real income.

Notes: A simple regression of personal income per capita for the U.S. states is estimated from cross-section data for the years 1929, 1950, 1970 and 1990 with each state's distance from the equator as the regressor. While proximity to the equator is noted to have a sizable adverse effect on income, elasticity of personal income per capita with respect to “tropicality” shows a steady and somewhat dramatic decline during this 60-year period. The estimates indicate that the disadvantage of tropicality is not immutable, and need not imply a developmental determinism.

Notes: Additivity is an important property for the aggregation methods used in constructing purchasing power parities. For a practical definition of additivity, this paper categorises all aditive methods. First of all, a generalisation of the Geary-Khamis method of aggregation is defined: this is called the Generalised Geary-Khamis, (GGK), approach. The key result proved is that, within a broad class of possible aggregation methods, the set of additive methods is precisely equivalent to the set of GGK indices. Some implications of this categorisation of additive methods are considered, both in the multilateral and bilateral cases. For example, in the multilateral case, the Iklé index is set in context as another special case of the GGK approach. In the bilateral case, it is shown that there always exists a GGK, (and therefore additive), equivalent to the Fisher Index.

Notes: National accounting issues related to forest resources have attracted much attention recently. The net-depletion method, the most popular method for estimating aggregate changes in the value of timber stocks, tends to overstate both the depreciation of mature forests due to harvests and the appreciation of immature forests due to growth. Alternative, correct methods, which I term the net-price and El Serafy variations, can be derived from an asset valuation model that takes forest age into account. An empirical example indicates that estimates from the net-depletion method can deviate from actual values by up to 40 percent for some age classes.

Notes: We examine the sensitivity of U.K.-Spanish poverty comparisons to variations in the dependence of equivalence scales on household size and composition, using evidence from national household budget surveys. We sum up these comparisons using subjective confidence levels. Taking into account the dissimilarities in the distribution of incomes and needs across countries, we find, inter alia, that although the poor are typically more numerous in Spain than in Britain, the actual headcount differences may vary by up to 10 percent of the population when needs allowances are altered, even when kept the same across the two countries. Comparisons of poverty composition across the two countries are also very sensitive to the choice of equivalence scale parameters. Generally, however, the proportion of single adults among the poor is much less important in Spain than in Britain, the reverse being true for households with three or more adults.

Notes: Using data from the Luxembourg Income Study, I study the sensitivity of cross-national income poverty comparisons to the method in which poverty is measured. Absolute poverty comparisons that keep the purchasing power at the poverty line constant across countries lead to conclusions that differ from relative poverty comparisons in which the real value of the poverty line varies with average income. The absolute poverty ranking of countries also varies as the real value of the poverty line is lowered. Cross-national differences in household characteristics are largely irrelevant in explaining poverty differences.

Notes: Using longitudinal data which include real estate wealth, financial assets as well as consumer durables, changes in the distribution of wealth in Sweden are related to major changes in asset prices and in incentives to hold various assets in the 1980s and the beginning of the 1990s. Our analysis of the mobility of wealth indicates that decile mobility is higher in Sweden than in the U.S., while the analysis of who is gaining and who is loosing shows results similar to those of previous studies.

Notes: We demonstrate that the criteria put forward by Atkinson and Bourguignon (1987) can be satisfactorily applied to the analysis of poverty even when the demographic composition of society and the definition of poverty change over time. We show that they provide both sufficient and necessary conditions for any robust conclusions concerning the changes in welfare and poverty. We apply these criteria to a set of data tracking annual income distribution movements in France from 1977 to 1994. The Atkinson and Bourguignon criteria posit that recent changes in poverty are a function of macroeconomic fluctuations in activity.

Notes: This study focuses on the role of foreign-born households in Canada's asset market. An empirical analysis of wealth accumulation is conducted for a large sample of Canadian households circa 1977–84. This study period reflects a change in Canada's immigration policy which resulted in immigration Rows switching from Europe to Asia. A life-cycle framework is used to examine wealth accumulation behaviour of the foreign-born vis-à-vis Canadian-born households. The empirical results confirm the existence of an inverted ‘U’-shaped wealth-age profile for both Canadian and immigrant households. However, the 1977 results show that the rate of wealth accumulation is higher for the immigrant household than the Canadian-born household in pre-retirement years, while the 1984 results reveal the opposite. After retirement, the rate of wealth dissipation is slower for Canadians than for foreign-born households. Only the 1984 results indicate that public social security wealth displaces household savings for both the Canadian-born and the foreign-born by a small amount. Finally, an immigrant household exhibits a stronger transfer motive within a family than a Canadian-born household regardless of year tested.

Notes: This paper investigates the importance of increases in the productivity of producing capital in estimates of the profit rate decline which occurred in the United States during the period 1950–90. We find that, when profit rate measures take into account the increasing productivity of producing capital stock (as measured by the embodied labor required to produce it), the observed decline is about one-half that found using conventional measures of profit. This finding has important implications for interest rate and investment policies.

Notes: This article deals in an axiomatic manner with problems of definition, classification, and measurement in the national accounts. It argues that the elementary units which must be classified in national accounting are economic objects (real and financial), rather than transactions. The article defines briefly a set of postulates, and shows that the structure of a simple system of national accounting can be derived from them. There are twenty postulates—certain of them establishing basic categories such as sector, time, economic object, value (price); others establishing relations between categories (for example the notion of ownership); and others describing operations in which economic objects can be involved, such as production, final consumption, change of ownership, and change of debtor and creditor (in the case of financial objects). It is shown that the system of postulates makes it possible to consider a large number of accounting concepts (flows or stocks) as classes (baskets) of real objects (e.g., exports, real capital) or financial objects (e.g., payments, total debt of a sector). These concepts can be defined without reference to prices, although prices are necessary to measure them. Other concepts cannot be defined in this way in this system of postulates, for example value added, foreign balance, saving, net worth. However, it is possible to define magnitudes of the latter type and measure them in terms of value: for example, value added can be defined as the difference between the value of receipts and the value of outlays of a sector. In this way it is possible to establish algebraic relations among the national accounting concepts. (This article is a summary of certain parts of the doctoral thesis of the author, published in Norwegian in 1955.)

Notes: It is only within the last two years that the published United Kingdom accounts have been extended to include sector financial accounts; their use for market analysis is, therefore, still in its infancy.The sectors and sub-sectors distinguished in the financial accounts agree very closely with those recommended by the Working Group on Financial Statistics of the Conference of European Statisticians. A major difference is that in the United Kingdom accounts particular emphasis is placed on the distinction between the public sector and the private sector. For this purpose the public sector consists not only of general government but also includes public corporations (that is, public non-financial corporate enterprises). The classification of assets and liabilities is based on a general list which is also similar to that developed by the Conference of European Statisticians.Because of the large capital formation of public corporations and local authorities, the public sector is normally a substantial borrower from the pirvate sector, although its borrowing requirements fluctuate considerably from quarter to quarter because of the uneven incidence of tax receipts. The personal sector provides about one-third of the total saving of the economy, much of which is in the form of contractual saving—through life assurance and superannuation funds and the repayment of house purchase loans. No direct information is available about transactions in stocks and shares by the personal sector, but it is estimated that the sector is a very large seller of securities and in recent years its sales have amounted to £700 million a year.One factor which is important in the analysis of financial accounts and which is not shown specifically as part of the system is the rate of interest. The proportion of personal saving going into the different forms of short term assets has tended to vary according to the relative rate of interest received. The rate of interest also affects the pattern of borrowing by public authorities.The United Kingdom prepares short term forecasts of national income and of the balance of payments, and also forecasts of the borrowing requirement of the public sector and of the central government in particular. For internal purposes, forecasts are made of the various ways in which the government is expected to finance its borrowing requirement. These forecasts provide a useful framework for considering monetary prospects and are particularly important for showing the relation between the forecasts of the balance of payments and of government borrowing from domestic sources, especially from the banks.

Notes: After a short introduction, the first part of this paper (section 3 through 9) provides an outline of the revisions proposed to the System of National Accounts (SNA) of the United Nations which are now under discussion. These proposals were considered by an expert group at the end of 1964 and were accepted by the Statistical Commission of the United Nations in 1965 as the basis for further work on the extension and revision of the SNA. The aim of the revision is to provide a fully integrated system of accounts and balance sheets in which input-output, flows-of-funds and sector balance sheets are incorporated in a generalised accounting framework. Whereas the real side of the economy has been studied analytically in many countries (input-output analysis, demand analysis and so on) much less experience is available on modelling the financial side of the economy, apart from econometric work on saving behaviour, which is fairly widespread. Accordingly, the second part of the paper (sections 10 through 14) contains a discussion of financial model-building in which a number of possibilities are explored. The final topic discussed (section 15) is demographic accounting, by which is meant a framework for recording and analysing human, as opposed to economic, flows and stocks. The development of such a system arose out of the emphasis placed by the expert group on the integration of demographic and economic information.

Notes: This paper is essentially a summary of the book Measuring the Nation's Wealth (Volume 29, Studies in Income and Wealth, New York: National Bureau of Economic Research, 1964), which is the report of study directed by the author. The purpose o f the study was to assess the problems and possibilities of conducting a national census of real wealth as a basis for continuing wealth and balance sheet estimates for the U.S. economy, by major sector.It is stressed that the balance sheets and wealth estimates should be designed as a consistent part of an integrated system of national income accounts. Thus, valuation (at market prices and/or depreciated replacement costs), sectoring, and type-of-asset detail in the basic data and derived estimates should be compatible with the flow estimates contained in the economic accounts. Consistency of stock and flow estimates facilitates analysis of inter-relationships, and is helpful in the estimation process.It is recommended that in the U.S. asset data by broad categories be collected as part of the recurring economic censuses and other reporting systems, but that detail on fixed reproducible assets (construction and equipment) at cost, by year or period of acquisition, be obtained from a small sample of respondents in each industry. The detail would be useful in its own right, and also permit revaluation of the assets by use of price indexes and depreciation rates to a current depreciated replacement cost basis. Where feasible, respondent estimates of market values would also be obtained.The proposal is thus a compromise between the Japanese 1955 sample survey of assets, and the detailed wealth inventory of the U.S.S.R. which was begun in 1959. Preliminary work is now underway in the U.S. federal statistical agencies to expand collection of asset data, and to prepare comprehensive wealth estimates in the framework of the national income accounts.

Notes: Ľutilisation du SCN actuel pour les besoins de la coopération économique internationale est considérée ci-après à la lumière des expériences accumulées au sein de la Communauté Economique Européenne.Ľexpérience des années récentes prouve que si, dans une première étape, le SCN a pu servir de cadre général ďanalyse économique, ce cadre s'est rapidement révélé insuffisant lorsqu'il s'est agi de confronter des structures et des politiques nationales ou de définir des politiques coordonnées dans les domaines économique, social ou financier. Les travaux menés dans différents domaines ont montré la nécessitéďétendre, de détailler, de modifier et de préciser le système actuel de comptabilité nationale.Une question importante concerne ľintérêt de faire apparaître ou ďéliminer du système comptable les différences institutionnelles existant entre pays. Bien qu'à cet égard ľavis des utilisateurs ne soit pas toujours unanime, ľexpérience plaide en faveur ďun système reflétant pleinement les différences réelles de structure entre pays, mais suffisamment détaillé afin de permettre les regroupements fonctionnels nécessaires à certaines analyses.Ľarticle se termine par un bref rappel des principales critiques adressées au SCN actuel par ceux qui, dans le cadre de la Communauté Economique Européenne, se servent de la comptabilité nationale, critiques auxquelles la révision du SCN apportera, espérons-le, une réponse satisfaisante.