This article puts forth institutional change as endogenous in the analysis, an essential step to further progress in economic theory. If institutions are the rules of the game, organizations are the players; and it is the interaction between them that is key to institutional change. Furthermore, the choices players make are constrained by their mental models, built to deal with complex and limited information, and by the economies of scope, complementarities, and network externalities of the institutional matrix. The resulting bias in favor of choices consistent with the existing framework determines that institutional change is overwhelmingly incremental and path-dependent.
This article evaluates the employment and welfare effects of increased trade competition and protection in economies with wage dualism, unemployment, and on-the-job search. A micro-based measure of economy welfare distinguishes between workers and other sectors of the economy is developed to deal with labor market imperfections and distributional issues. For example, increased competition in high-wage sector goods reduces high-wage employment, but may or may not increase overall unemployment. Policy may be chosen to mitigate loss in worker earnings that are partly or wholly offset by gains to consumers of the importable.
This note uses a game theoretic model of a research and development race to analyze the effect that weakening patents has on the profitability and timing of research and development. The model assumes that there are two firms in the industry and that one of them has made an innovation. After the innovation, there is a change in patent policy that both allows the innovator's rival to benefit from the first innovation and makes it more likely that the noninnovator will benefit from additional innovations. Using this model, it is found that, in general, a second innovation in the industry will occur later than it would have if public policy had not weakened patents. There are two reasons for this result. First, since the firm that lost the first development race will benefit from its rival's innovation, its incremental profits from making a second innovation are lower. Second, weakening patents lowers the expected profits from additional innovations.
This article shows that there is a functional dependence between investment and financing decisions if the financing is done with long-term callable or noncallable debt. The dependence occurs if the long-term debt is risky and the dependence results in a misallocation of investment resources, that is, over-investment now and under-investment later. This dependence also eliminates the general conclusion in the literature that long-term callable debt always dominates long-term noncallable debt.
Michael Jensen developed a return-generating model to measure performance of managed portfolios. The model is based on single-period CAPM. The model has been criticized on the grounds that it contains measurement error and specification error. This article examines specification error and measurements error in the Jensen model. It uses errors-in-variables methodology and generalized functional form in an integrated fashion to measure performance of mutual fund managers and considers some econometric issues associated with errors-in-variables methodology. The methodology provides interval estimates of performance measures and risk measures in the presence of specification error and measurement error. The empirical results support the conclusion of previous mutual fund studies that fund managers are unable to outperform the market. These results are free of specification and measurement errors.
