OFFSHORE OUTSOURCING DECISION AND CAPITAL INTENSITY: FIRM‐LEVEL RELATIONSHIPS

In offshore sourcing, a firm chooses outsourcing to independent suppliers or in‐sourcing from own foreign direct investment (FDI) subsidiaries. Based on the firm‐level data on offshore make‐or‐buy decision covering all manufacturing industries, this paper compares averages, documents inter‐firm distributions, and estimates multinomial logit models of the firm's sourcing mode choice. As predicted by previous theoretical models, this paper directly confirms at the firm level that outsourcing firms tend to be substantially labor‐intensive compared with firms in‐sourcing from the same region, even after the firm's R&D intensity, firm size, or industry is controlled for. (JEL F23, L23, L24, L14)     

A LABORATORY STUDY OF DUOPOLY PRICE COMPETITION WITH PATIENT BUYERS

This article reports a duopoly experiment in which sellers compete to sell to a potentially patient buyer. Each period sellers simultaneously post prices and the buyer costlessly observes either one or both prices. The buyer can then either accept an observed price or reject all offers. Following a rejection, sellers may have an opportunity to post prices again in another round. We study how the duopolists' pricing behavior responds to changes in the likelihood of the buyer observing multiple prices, γ, and the probability of continuing to another round, δ. The unique stationary equilibrium features mixed strategies. Consistent with the equilibrium, observed prices are decreasing in γ and δ. Contrary to the equilibrium, however, buyers sometimes reject profitable price offers, and average prices are lower than predicted when only one round of offers is possible and higher than predicted in the multiple‐round game. (JEL D43, D83, L13)     

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)     

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)     

BERTRAND COMPETITION WITH ASYMMETRIC MARGINAL COSTS

This article tests the prediction of three discrete asymmetric duopoly price competition games in the laboratory. The games differ from each other in terms of the size of the cost asymmetry that induces a systematic variation in the difference between the firms' marginal costs. While the standard theory requires the low‐cost firm to set a price just equal to the high‐cost firm's marginal cost, which is identical across all three games, and win the entire market, intuition suggests that market price may increase with a decrease in the absolute difference between the two marginal costs. We develop a quantal response equilibrium model to test our competing conjecture. (JEL L11, L12, C91, D43)     

ESTIMATION OF THE DEPRECIATION RATE OF PHYSICAL AND R&D CAPITAL IN THE U.S. TOTAL MANUFACTURING SECTOR

Numerous studies on production and cost, the sources of productivity, and endogenous growth have recognized the pivotal role played by physical and R&D capital stocks. Analysis of the contributions of these capitals often requires measures of the stocks of physical and R&D capital, which in turn requires measuring their depreciation rates. In this paper we specify a model of factor demand that allows us to estimate the depreciation rates of both physical and R&D capital jointly with other model parameters. The model is estimated for the U.S. total manufacturing sector.     

TRANSPARENCY IN MARKETS FOR EXPERIENCE GOODS: EXPERIMENTAL EVIDENCE

We propose an experimental design to investigate the role of information disclosure in the market for an experience good. The market is served by a duopoly of firms that choose both the quality and the price of their product. Consumers differ in their taste for quality and choose from which firm to buy. We compare four different treatments in which we vary the degree to which consumers are informed about quality. Contrary to theoretical predictions, firms do not differentiate quality under full information. Rather, both tend to offer products of similar, high quality, entailing more intense price competition than predicted by theory. Under no information, we observe a “lemons” outcome where quality is low. At the same time, firms manage to maintain prices substantially above marginal cost. In two intermediate treatments, quality is significantly higher than the no‐information level, and there is evidence that prices become better predictors of quality. Taken together these findings suggest that information disclosure is a more effective tool to raise welfare and consumer surplus than theory would lead one to expect. (JEL L15, C91, D82)     

Outsourcing and union power

The outsourcing of union work and jobs either diffuses or diminishes union membership, depending on perspective and situation. The correlation of trends in union membership to trends in union power, while less than perfect, has until recently been relatively strong over the past sixteen years. The fact that as diverse a sample of unions as AFSCME, SEIU, and UAW have chosen to make outsourcing a prominent labor/public relations issue suggests that the correlation continues to be perceived by the union movement to be significant, notwithstanding the efforts of the “new” leadership of the AFL-CIO to break that link with respect to union political power by “taxing” member unions and their members to contribute both money and militancy to the 1996 election cycle. Although outsourcing may lead only to the diffusion of union membership either within or between unions, as opposed to the diminution of union membership, this fact has not received a great deal of attention. The net effect on total union membership of outsourcing from one union employer to another union employer is unclear, although the effect on the membership of the union at the outsourcing employer is not. The redistribution of membership within a union as a result of outsourcing is likely to have little immediate impact on union power. However, as even the best case scenario presented above suggests, it may have significant long-run deleterious effects on union bargaining power by taking labor out of a sheltered market and putting it into potentially competitive market. This is particularly likely to be the case when outsourcing (1) places the outsourced work into a different industry or wage contour and (2) creates the possibility of moving from sole-source to multiplesource supplier arrangements. The redistribution of membership between unions as a result of outsourcing is unlikely to have a major impact on union power broadly defined. It can have, however, serious deleterious effects in terms of the power of an individual union, as suggested in my “competitive case” scenario. The fact that one union’s losses due to outsourcing may be another union’s gain is of little consolation to the losing union. That act, in and of itself, may make the threat of outsourcing a potential union “Achilles heel” at the bargaining table by placing it into competition with some other, perhaps unknown, union as well as possibly nonunion competition. The most obvious threat to union power comes from outsourcing that diminishes union membership overall by transferring jobs from union to nonunion employers. The willingness and ability of employers to move work/jobs entirely out of the orbit of union control constitutes, in terms of power and particularly union bargaining power, a revisitation of the phenomenon of the “runaway shop.” It may also be viewed as a proactive form of hiring permanent replacements for (potentially) striking workers. The union options in dealing with such a challenge are to endeavor to preclude outsourcing through legislation or collective bargaining or to chase the work by organizing the unorganized, hopefully with the help of the unionized outsourcing employer. Neither option may be easy, but as the 1996 auto industry negotiations suggest, the former may be less difficult than the latter. The possibility that outsourcing from union to nonunion employer may provide unions with the power to organize from the top (outsourcer) down (outsourcee) cannot be entirely ignored as the issue of supplier “neutrality” reportedly was raised in the 1996 auto negotiations. The adverse effects of outsourcing on union political and financial power, by virtue of its impact on the level or distribution of union membership, can and may well be offset by an increase in union activism—as measured by dues levels, merger activity, organizing commitment, and political action. The adverse effects of outsourcing on union bargaining power are more problematical from the union standpoint. The effect of outsourcing, whatever its rationale or scenario, appears to be to put union labor back into competition. Thus, outsourcing constitutes yet another challenge to the labor movement in its ongoing and seemingly increasingly unsuccessful battle to take and keep U.S. union labor out of competition by proving itself able and willing to organize to the extent of the market and standardizing wages in that market.     

International and Intersectoral R&D Spillovers in the OECD and East Asian Economies

This study empirically explores international and intersectoral R&D spillover effects on the total factor productivity growth of manufacturing and nonmanufacturing sectors based on a pooled time-series data set of 14 OECD economies and 3 East Asian economies—Korea, Singapore, and Taiwan. The study finds that foreign manufacturing R&D has strong influence on domestic productivity growths of both sectors and that domestic manufacturing R&D has a substantial intersectoral R&D spillover effect on domestic nonmanufacturing productivity growth. The social rates of return to manufacturing R&D are estimated to be two to six times greater than the private rates of return.     

Structural equation model for the evaluation of national funding on R&D project of SMEs in consideration with MBNQA criteria

Financial support on the R&D in Science & Technology for SMEs at the governmental level plays a crucial role on the improvement of the national competitiveness. Korea Science & Engineering Foundation (KOSEF) has supported the R&D projects of SMEs with the competitive technology ability by way of the Science and Technology Promotion Fund. In this paper, we propose a structural equation model (SEM) to evaluate the performance of such a funding program in terms of three aspects: output, outcome and impact under given funding inputs, R&D environment of a recipient company, and external evaluation programs of funding organization. We adopt Malcolm Baldrige National Quality Award (MBNQA) criteria to assess the R&D environmental factors of recipient companies. In addition, we test the effect of interim evaluation of the funded project. The proposed model is applied to the real case and is used to identify the best practices as well as to provide feedback information for the improvement of the government funding programs of the R&D projects of SMEs.     

THE NATURE OF OUTSOURCING RELATIONSHIPS: EVIDENCE FROM OAP PRICES

This paper studies the extent and variation in production cost pass‐through for U.S. outsourcing imports. Data from 4,676 products imported through the U.S. overseas assembly program show that outsourcing imports were characterized by incomplete pass‐through of production and trade costs to import prices. Notably, pass‐through was higher for products assembled in high education countries while the response of outsourcing import prices to competing suppliers' prices was largest for products sold by firms in capital‐intense industries. The reasons for these cross‐country and cross‐industry differences, as they relate to theories of outsourcing and trade, are explored. (JEL F1, F2)     

CONTRACT DESIGN AND SELF‐CONTROL WITH ASYMMETRIC INFORMATION

We study optimal contracting by a monopolistic seller of investment goods to a time‐inconsistent consumer and, in doing so, introduce asymmetric information to the model of DellaVigna and Malmendier (2004) . We find (1) the below‐marginal‐cost‐pricing rule may fail for a low‐value consumer; (2) the firm's profit is no longer unaffected by the consumer's short‐run impatience, as the latter is sophisticated. We find that there is an important threshold value of short‐run patience. When the consumer's short‐term patience is below this level, then, as the patience increases, the firm suffers. When the consumer's short‐run patience is above this threshold, then, as it increases, the firm benefits. Finally, we show that unlike monopoly, perfect competition with asymmetric information achieves the first‐best outcome. (JEL D03, D82, D91)     

Social capital and innovation dynamics in district-based local systems

The idea behind this paper is that social capital (SC) is interpreted as a component of an investment, which implies entangled private and public benefits. Within a theoretical framework that considers SC as the public component of the impure public good R&D we show that the ‘civic culture’ of the district in which a firm is located is not a sufficient incentive for the firm to increase its investment in SC, because SC/networking dynamics might positively and complementarily evolve only if the opportunity cost of investing in innovation is sufficiently low. Consequently, we focus our attention on a specialised biomedical industrial district characterised by a strong pattern of innovative activity. We observe that R&D and networking/social capital arise as complementary driving forces of innovation outputs. When the empirical evidence confirms that this complementarity plays a key role, policy efforts should be targeted toward both market and non-market characteristics, rather than solely to the production of local public goods or innovation inputs as independent elements of firm performance. This is very important in terms of policy effectiveness. In fact, we argue that SC/networking dynamics might positively evolve only if the private opportunity cost of investing in R&D innovation is sufficiently low. Nevertheless, this exogenous economic incentive works as long as complementarity, as defined here, holds.     

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.     

CONTRACT DELEGATION WITH BARGAINING

In the theoretical literature on contract delegation, it is assumed that the contractor has all the bargaining power when contracts are proposed to the subcontractee. In this case, the principal prefers centralized to decentralized contracting structures. This paper analyzes the consequences of relaxing this assumption. It is shown that when contracts are determined by bargaining, the principal might prefer decentralization to centralization. Furthermore, it is shown that this can happen even when subcontractees have very little bargaining power. The results explain, for example, the coexistence of centralized and decentralized contracting in public procurement. (JEL D23, D82, L22)     

Better Processing of Consonantal Over Vocalic Information in Word Learning at 16 Months of Age

Previous research using the name‐based categorization task has shown that 20‐month‐old infants can simultaneously learn 2 words that only differ by 1 consonantal feature but fail to do so when the words only differ by 1 vocalic feature. This asymmetry was taken as evidence for the proposal that consonants are more important than vowels at the lexical level. This study explores this consonant‐vowel asymmetry in 16‐month‐old infants, using an interactive word learning task. It shows that the pattern of the 16‐month‐olds is the same as that of the 20‐month‐olds. Infants succeeded with 1‐feature consonantal contrasts (either place or voicing) but were at chance level with 1‐feature vocalic contrasts (either place or height). These results thus contribute to a growing body of evidence establishing, from early infancy to adulthood, that consonants and vowels have different roles in lexical acquisition and processing.     

MONETARY NEUTRALITY UNDER EVOLUTIONARY DOMINANCE OF BOUNDED RATIONALITY

We provide evolutionary game‐theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock by introducing a novel analytical notion that we call boundedly rational inattentiveness. We investigate the behavior of the general price level in a context where a firm can either pay a cost (featuring a random component) to update its information set and establish the optimal price (Nash strategy) or freely use non‐updated information and establish a lagged optimal price (bounded rationality strategy). We devise evolutionary microdynamics (with and without mutation) that, by interacting with the dynamics of the aggregate variables, determines the coevolution of the frequency distribution of information‐updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. As it turns out, evolutionary learning dynamics take the information‐updating process to a long‐run equilibrium configuration in which, albeit either most or even all firms play the bounded rationality strategy, the general price level is the symmetric Nash equilibrium price and the monetary shocks have persistent, although not permanent, impacts on real output. (JEL E31, C73, D83)     

When do value chains go global? A theory of the spatialization of global value chains

In this article, I synthesize and extend the theoretical literature on global commodity chain (GCC) and global value chain (GVC) governance to generate a theory of the ‘globalness’ of value chains and the spatialization of value chain linkages. Drawing from the original GCC dichotomy of buyer/producer‐driven commodity chains, I emphasize the height of entry barriers to manufacturing and supplier capability differentials across the North–South divide as determinants of the amount and geographic extent of global offshoring behaviour. Using a novel empirical approach to the measurement of global offshoring behaviour at the global industry level, the article shows that the original GCC governance scheme successfully predicts the levels, rates and timing of global production fragmentation across three networked industries. Combining the original GCC governance scheme with the more recent GVC governance types, the theory leads to predictions about the specific types of GVC linkages that might occur given the drivenness of a chain and the geographical location of lead firms and their suppliers. I conclude by drawing out the theory's implications for our understanding of the link between value chain formation and economic development in the global South and suggesting areas for future research.     

ASSET PRICE BUBBLES AND TECHNOLOGICAL INNOVATION

We introduce borrowing constraints into a two‐sector Schumpeterian growth model and examine the impact of asset price bubbles on innovation. In this environment, rational bubbles arise when the intermediate good producing R&D sector is faced with adverse productivity shocks. Importantly, these bubbles help alleviate credit constraints and facilitate innovation in the stagnant economy. On the policy front, we make a case for debt financed credit to the R&D sector. Further, we establish that a constant credit growth rule (akin to the Friedman rule) outperforms the often prescribed counter‐cyclical “lean against the wind” credit policy. (JEL E32, E44, O40)     

ENTRY COORDINATION AND AUCTION DESIGN WITH PRIVATE COSTS OF INFORMATION ACQUISITION

Auction design with endogenous entry is complicated by entry coordination among bidders due to multiple entry equilibria issue. This article studies auction design when information acquisition costs are private information of bidders. We show that this problem can be resolved by sufficient dispersion in these costs. First, we find that a simple second‐price auction with no entry fee and a reserve price equal to the seller's valuation is ex ante efficient, while a revenue‐maximizing auction involves personalized entry fees, which are determined by the hazard rates of their information acquisition cost distribution. Second, we show that sufficient dispersion in the information acquisition costs (more dispersion than a particular uniform distribution by the Bickel‐Lehman dispersive order) can coordinate bidders and implement uniquely the desirable entry. The dispersion in information acquisition costs is also necessary for this “unique implementation” result. (JEL D44, D82)