EMISSION TAXES,CLEAN TECHNOLOGY COOPERATION,AND PRODUCT MARKET COLLUSION: EXPERIMENTAL EVIDENCE

We use a laboratory experiment to study the link between cooperative research and development (R&D) in clean technology and collusion in a downstream product market in the presence of a time‐consistent emissions tax. Such a tax creates additional interconnections between firms, in addition to the standard technological spillovers. Our results show a strong link between R&D cooperation and market collusion under symmetric R&D spillovers in a duopoly, but when the spillovers are asymmetric, R&D cooperation does not necessarily result in collusion. With symmetric spillovers, the link between R&D cooperation and collusion remains strong even in three‐ and four‐firm industries. (JEL C90, L5, O30, Q55)     

AN EXPERIMENTAL ANALYSIS OF DYNAMIC INCENTIVES TO SHARE KNOWLEDGE

Knowledge‐sharing arrangements are an important part of the innovation process as they help firms acquire technological capabilities, shorten development time, and spread risk and cost. A question central to the study of knowledge‐sharing arrangements is the impact of competition on cooperation. While cooperation has the benefit of avoiding duplication, it may have an adverse effect on the competitive advantage of a leading firm. Hence, firms face a difficult challenge during the innovation process while deciding which components of it, if any, to carry out in collaboration with other firms. This paper reports the results of controlled laboratory experiments which identify how the decision to form research joint ventures changes with both relative progress during the R&D process and the intensity of product market competition. The design is based on a modified version of Erkal and Minehart “Optimal Sharing Strategies in Dynamic Games of Research and Development.” Research Paper 1038, University of Melbourne, Department of Economics, 2008. The results indicate that if expected profits are such that the lagging firms always stay in the race, cooperation unravels as firms move forward in the discovery process and as monopoly profits become more attractive. These results are generally consistent with the theoretical predictions. (JEL C91, L24, O30, D81)     

AN EXPERIMENT ON INNOVATION AND COLLUSION

This paper examines the relationship between product innovation and the success of price collusion using novel laboratory experiments. Average market prices in low innovation (LO) experiments are significantly higher than those in high innovation, but otherwise identical experiments. This price difference is attributed to LO experimental subjects' greater common market experience. The data illustrate how collusion can be perceived as the “only way to make it” in LO markets where product innovation is not a viable strategy for increasing profits. They suggest that product homogeneity can be a proximate cause, and product innovation an ultimate cause, of collusion. (JEL L41, L10, C92)     

MANAGING R&D IN VERTICAL RELATIONSHIPS

We study the optimal strategy for research and development (R&D) in a buyer‐supplier relationship. The buyer chooses whether to (1) insource a cost‐reducing R&D to its own research‐subunit or to (2) outsource it to its manufacturing supplier. The buyer cannot observe the R&D effort in either case, but can better observe the R&D result when the R&D is conducted internally. According to our analysis, the buyer prefers insourcing R&D to mitigate information asymmetry when the R&D cost is either small or large. When the R&D cost is intermediate, however, the buyer prefers outsourcing R&D, and can achieve the full information outcome (first‐best outcome) despite the information asymmetry associated with outsourcing R&D. Moreover, the buyer's preference for outsourcing high‐cost R&D increases when the R&D is more likely to succeed or to generate significant cost reductions, or the R&D result is more difficult to predict. Our analysis provides a theoretical explanation for the increasing trend of outsourcing innovation to manufacturing suppliers. (JEL D82, L22, L23)     

CASH INFLOWS AND BUBBLES IN ASSET MARKETS WITH CONSTANT FUNDAMENTAL VALUES

Previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals follow a time trajectory that is constant over time. This contrasts with other research indicating that greater cash levels increase prices when fundamental values are decreasing over time. We report a new experiment in which we show that greater initial cash levels are indeed associated with higher prices when fundamental values are constant over time. Thus, high cash levels will lead to bubbles, if the cash is introduced before the market opens. Our results reconcile the two previous sets of findings. (JEL C90, D03, G02, G12)     

NORMS OF PUNISHMENT: EXPERIMENTS WITH STUDENTS AND THE GENERAL POPULATION

Norms of cooperation and punishment differ across societies, but also within a single society. In an experiment with two subject pools sharing the same geographical and cultural origins, we show that opportunities for peer punishment increase cooperation among students but not in the general population. In previous studies, punishment magnified the differences across societies in people's ability to cooperate. Here, punishment reversed the order: with punishment, students cooperate more than the general population while they cooperate less without it. (JEL C72, C90, Z13)     

STRATEGIC ENFORCEMENT,INTELLECTUAL PROPERTY RIGHTS,AND CONTRACTUAL R&D

This study examines the role of intellectual property rights (IPRs) in contractual research and development (R&D) in developing countries. We find that strong IPRs provide incentives for firms, both multinational and local, to specialize in R&D activities in which they have competitive advantage (the specialization effect). They also facilitate the switching process from imitators to potential innovators for local firms (the switching effect). Moreover, we also demonstrate that a multinational firm's strategic IPRs enforcement behavior can be an effective instrument for subsidizing contractual R&D in developing countries (the subsidizing effect). We further illustrate how a policy mix of IPRs and a foreign direct investment subsidy in these countries affects R&D activities by adding an offshore R&D subsidiary as an additional organizational form. (JEL L13, O31, O34)     

R&D AND CREDIT RATIONING IN SMEs

We study the effects of credit rationing on research and development (R&D) investment using survey and accounting data on a large representative sample of manufacturing small‐ and medium‐sized enterprises (SMEs). Our econometric model accounts for the endogeneity of our credit rationing indicator and employs an innovative theory‐based identification strategy. We find that credit rationing has a significantly negative effect on both the probability to set up R&D activities and on the level of R&D spending (conditioned on the R&D decision), but the overall estimated reduction in R&D spending is largely to be associated with the first effect. (JEL G21, D82, O32, C35)     

CRITICAL ISSUES IN THE PRACTICE OF MARKET DESIGN

The years since 1994 have witnessed the emergence of market design as a new discipline within economics, in which research and practice exert powerful mutual influences in matching and auction markets. The problem of designing well‐functioning auction markets has led economic designers to revisit such fundamental issues as the definitions of commodities, the ways participants communicate with markets, the trade‐offs between the incentives provided for truthful reporting and other attributes of mechanism performance, and the determinants of the scope of markets, especially whether and how trade in different goods is linked. (JEL D44, C78)     

The social order of markets

In this article I develop a proposal for the theoretical vantage point of the sociology of markets, focusing on the problem of the social order of markets. The initial premise is that markets are highly demanding arenas of social interaction, which can only operate if three inevitable coordination problems are resolved. I define these coordination problems as the value problem, the problem of competition and the cooperation problem. I argue that these problems can only be resolved based on stable reciprocal expectations on the part of market actors, which have their basis in the socio-structural, institutional and cultural embedding of markets. The sociology of markets aims to investigate how market action is structured by these macrostructures and to examine their dynamic processes of change. While the focus of economic sociology has been primarily on the stability of markets and the reproduction of firms, the conceptualization developed here brings change and profit motives more forcefully into the analysis. It also differs from the focus of the new economic sociology on the supply side of markets, by emphasizing the role of demand for the order of markets, especially in the discussion of the problems of valuation and cooperation.

---

LINKING WEALTH AND PUNISHMENT EFFECTIVENESS: PUNISHMENT AND COOPERATION UNDER CONGRUENT HETEROGENEITIES

Global and local cooperation in supplying global public goods is often insufficient. In this respect, laboratory experiments show that peer punishment is an effective cooperation-enhancing instrument. However, it is unclear whether peer punishment would facilitate cooperation and public good provision even under congruent heterogeneities in wealth and punishment effectiveness. To this end, we experimentally study the effect of peer punishment under joint heterogeneities, where either the richest or the poorest member is also the most effective punisher. We compare these joint heterogeneities to treatments with single heterogeneities in either endowment or punishment effectiveness and to a baseline symmetry treatment with homogeneous parties. We find that heterogeneity in punishment effectiveness does not matter for cooperation, whereas endowment heterogeneity reduces cooperation compared to symmetry. This is because rich members contribute a lower portion of their endowment to the public good than their poorer counterparts. We also observe that cooperation is higher under joint heterogeneities in endowment and punishment effectiveness than under endowment heterogeneity (with no differences than under symmetry). This holds even when the rich party gains less from cooperation and is the most effective punisher. (JEL C92, D74, H41)     

RISING R&D INTENSITY AND ECONOMIC GROWTH

Over the past decades, private R&D spending in the United States and other developed countries has been growing faster than gross domestic product. At the same time, the growth rates of per-capita and aggregate output have been rather stable, possibly declining slightly. This article proposes a growth model that can account for the observed phenomenon by explicitly describing competition among technological leaders and followers in individual markets in a way that is consistent with existing studies on firms' motivation to invest in R&D. The model shows the possibility that the unsustainable trend of rising R&D intensity persists for a very long time. (JEL O3, O4, L1)     

INFORMATION SHARING AND TACIT COLLUSION IN LABORATORY DUOPOLY MARKETS

This paper reports 45 laboratory duopoly markets that examine the importance of information sharing in facilitating tacit collusion under conditions of demand uncertainty. Sellers in these repeated laboratory markets generally shared information when possible to reduce their demand uncertainty, which led to output reductions in some demand states. Risk aversion is a likely explanation for this sharing, but some sellers also appeared to employ a strategy of information concealment to punish non-colluding rivals. Nevertheless, output choices were similar in control treatments that forced sellers to share or conceal information, so the information sharing itself did not substantially increase tacit collusion. ( JEL C92, D80, L13)     

SELECTION INTO AUCTIONS FOR RISKY AND AMBIGUOUS PROSPECTS

We study experimentally the selection into first‐price sealed‐bid auctions for a risky or an ambiguous prospect. Most subjects chose to submit a bid for the risky prospect, leading to thinner markets for the ambiguous prospect. Transaction prices for both prospects were equal although subjects expected the ambiguous markets to be smaller. Evidence of a positive correlation between risk and ambiguity aversion suggests that the ambiguous markets were populated by relatively risk tolerant bidders. A control experiment with selection in a simple choice task shows that subjects correctly anticipate the effects of selection on market size and risk attitudes. (JEL C91, D44, D81)     

GROWTH AND CONVERGENCE WHEN TECHNOLOGY AND HUMAN CAPITAL ARE COMPLEMENTS

This article presents a model of endogenous growth, in which a firm's technology and a country's human capital stock are complementary in the production of output. Production technologies are created by costly research and development (R&D) and are owned by firms that can freely choose where in the world to produce. Both production and R&D have a positive effect on a country's human capital stock. While all countries typically grow at the same rate in the long run, they differ in their levels of human capital, per capita output, and the quality of the technologies that are used in production. A country's relative position in terms of productivity is history dependent. Countries that start out with a lower human capital stock or industrialize later end up with a lower per capita GDP in long‐term equilibrium. (JEL O4, O33, O47)     

Evaluating knowledge benefits of automotive lightweighting materials R&D projects

This paper presents a set of metrics used to evaluate short-run knowledge benefits that accrued from research and development (R&D) projects funded in fiscal years 2000–2004 by automotive lightweighting materials (ALM) of the U.S. Department of Energy (DOE). Although DOE presents to Congress energy, environmental, and security benefits and costs of its R&D efforts under the Government Performance and Results Act, DOE has yet to include knowledge benefits in that report [U.S. Department of Energy. (2007). Projected benefits of federal energy efficiency and renewable energy programs: FY2008 budget request. NREL/TP-640-41347 (March). Washington, DC: National Renewable Energy Laboratory for DOE Energy Efficiency and Renewable Energy. Retrieved February 12, 2007 from http://www1.eere.energy.gov/ba/pba/2008_benefits.html].ALM focuses on development and validation of advanced technologies that significantly reduce automotive vehicle body and chassis weight without compromising other attributes such as safety, performance, recyclability, and cost [U.S. Department of Energy. (2005a). Automotive lightweighting materials 2004 annual progress report. Washington, DC: DOE Energy Efficiency and Renewable Energy. Retrieved March 30, 2005 from http://www.eere.energy.gov/vehiclesandfuels/resources/fcvt_alm_fy04.shtml]. The ultimate goal of ALM to have lightweighter materials in vehicles hinges on many issues, including the (1) collaborative nature of ALMs R&D with the automobile industry and (2) manufacturing knowledge gained through the R&D effort.The ALM projects evaluated in this paper yielded numerous knowledge benefits in the short run. While these knowledge benefits are impressive, there remains uncertainty about whether the research will lead to incorporation of lightweight materials by the Big Three automakers into their manufacturing process and introduction of lightweight vehicles into the marketplace. The uncertainty illustrates a difference between (1) knowledge benefits and (2) energy, environmental, and security benefits emanating from R&D.     

APPLICATIONS BARRIER TO ENTRY AND EXCLUSIVE VERTICAL CONTRACTS IN PLATFORM MARKETS

Our study extends the empirical literature on whether vertical restraints are anticompetitive. We focus on exclusive contracting in platform markets, which feature indirect network effects and thus are susceptible to an applications barrier to entry. Exclusive contracts in vertical relationships between the platform provider and software supplier can heighten entry barriers. We test these theories in the home video game market. We find that indirect network effects from software on hardware demand are present, and that exclusivity takes market share from rivals, but only when most games are nonexclusive. The marginal exclusive game contributes virtually nothing to console demand. Thus, allowing exclusive vertical contracts in platform markets need not lead to domination by one system protected by a hedge of complementary software. Our investigation suggests that bargaining power enjoyed by the best software providers and the skewed distribution of game revenue prevents the foreclosure of rivals through exclusive contracting. (JEL L42, L63, D12)     

The Sonoran Desert’s Domestic Bracero Programme: Institutional Actors and the Creation of Labour Migration Streams

This paper traces the journeys of male migrants to Empalme, Sonora, Mexico to uncover the development of the often overlooked domestic bracero programme that operated in conjunction with its well‐known international equivalent. Drawing on interviews and observations with ex‐braceros who met at a park near the Mexico‐US border, I examine their experiences and participation in Mexico’s domestic bracero program, an unintended and unexplored consequence of its international counterpart. The study shows how regulation and control were constantly reinvented at every step of the selection process by state actors and their affiliates in Mexico. The paper reveals how the oversupply of labour and modernization of agriculture in Sonora resulted in the development of a migration industry where local municipal leaders, coyotes, the state, and Mexican agribusiness capitalized from men’s displacement. The migration industry during the bracero selection process controlled who gained access to the United States labour market by capturing migrant labour en route to the United States in the process fueling a thriving cotton industry in the otherwise stagnant Sonoran Desert economy. The study concludes by taking the lessons from the historic domestic bracero programme to show one instance in which internal and international labour markets were closely interwoven. In the end, I call for more research that examines the relationship between markets on both sides of the border that uncovers how networks are not only structured by personal ties but also by state and market relations.     

SUPERMARKETS AS A NATURAL OLIGOPOLY

This paper proposes and tests a model of supermarket competition based upon an endogenous fixed cost (EFC) framework (Sutton, J. Sunk Cost and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge: MIT Press, 1991.). The relevance of the EFC framework to supermarket competition stems from the industry's surprisingly uniform competitive structure: irrespective of the size of the local market, a small number of firms (between three and six) capture the majority of sales. As markets grow, local rivalry drives firms to expand their fixed investments, limiting the number of firms that can profitably enter even the largest markets. Although markets stay concentrated, competition remains fierce, reflecting the inherently rivalrous nature of the underlying competitive mechanism. The goal of this paper is to identify the strategic focus of this rivalry, namely the drive to provide an ever greater variety of consumer products, and to eliminate alternative explanations for the observed structure by highlighting the unique form of firm conduct that characterizes this industry. (JEL D21, D43, L11, L13, L22, L81)     

Cooperative relationships in competitive markets

This paper focuses on cooperative and relationships in competitive markets. According to economic theory, stable relationships between buyer and seller should only emerge due to some kind of market deficiencies. However, our results suggest that buyer and seller cooperate and develop relationships in a competitive market. In the international salmon industry, importers tend to concentrate their import on one or a few exporters only. However, the importers will occasionally buy salmon from other exporters. This observation indicates that both cooperation and competition will be present in a competitive market. For buyers and sellers there may be efficiency gains by both cooperating and being exposed to competition.