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

We analyze a repeated prisoners’ dilemma game played in a community setting with heterogeneous types. The setting is such that individuals choose whether to continue interacting with their present partner, or separate and seek a new partner. Players’ types are not directly observed, but may be imperfectly inferred from observed behavior. We focus on a class of equilibria that satisfy zero tolerance and fresh start. We find that the punishment for defecting and the reward for cooperating are driven by the formation and the dissolution of long-term, high-paying relationships: an individual who defects, aborts a long-term relationship that he is in, or that he might have entered into, is thrown into short-term interactions with individuals who are likely to defect and, consequently, receives low payoffs. On the flip side, an individual who cooperates, enters into or prolongs a long-term interaction with a partner who cooperates and, consequently, receives high payoffs.

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

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

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

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

Recording industry revenue has fallen sharply in the last 3 years, and some - but not all - observers attribute this to file sharing. We collect new data on albums obtained via purchase and downloading, as well as consumers' valuations of these albums, among a sample of U. S. college students in 2003. We provide new estimates of sales displacement induced by downloading, using both ordinary least squares and an instrumental variables approach with access to broadband as a source of exogenous variation in downloading. We find that each album download reduces purchases by about .2 in our sample, although possibly by much more. Our valuation data allow us to measure the effects of downloading on welfare as well as expenditure in a subsample of University of Pennsylvania undergraduates, and we find that downloading reduces their per capita expenditure ( on hit albums released 1999 - 2003) from $126 to $101 but raises per capita consumers' surplus by $70.

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

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

In this paper we construct and analyze a growth model with the following three in- gredients. (i) Technological progress is embodied. (ii) The production function of a firm is such that the firm makes both technology upgrade as well as capital and la- bor decisions. (iii) The firm's production technology is putty-clay. We assume that there are disincentives to the accumulation of capital, resulting in a divergence be- tween the social and the private cost of investment. We solve a single firm's problem in this environment. Then we determine general equilibrium prices of capital goods of different vintages. Using these prices we aggregate firms' decisions and construct the theoretical analogues of National Income statistics. This generates a relationship between disincentives and per capita incomes. We analyze this relationship and show the quantitative and qualitative roles of embodiment and putty-clay. We also show how the model is taken to data, quantified and used to determine to what extent income

In this paper we construct and analyze a growth model with the following three ingredients. (i) Technological progress is embodied. (ii) The production function of a firm is such that the firm makes both technology upgrade as well as capital and labor decisions. (iii) The firm’s production technology is putty-clay. We assume that there are disincentives to the accumulation of capital, resulting in a divergence between the social and the private cost of investment. We solve a single firm’s problem in this environment. Then we determine general equilibrium prices of capital goods of different vintages. Using these prices we aggregate firms’ decisions and construct the theoretical analogues of National Income statistics. This generates a relationship between disincentives and per capita incomes. We analyze this relationship and show the quantitative and qualitative roles of embodiment and putty-clay. We also show how the model is taken to data, quantified and used to determine to what extent income gaps across countries can be attributed to disincentives.

Overview and Results. Recently there has been a surge of interest in how cooperative behavior can arise as an equilibrium outcome in a dynamic community setting. The problem that has to be overcome in such setting is that individuals interact with varying opponents so the usual mechanism of personal and quick retaliation against noncooperators is not available. In this paper we continue this line of research, studying the role of heterogeneity of types, the endogenous formation of long term relationships, and the role of legal institutions in this process. Anecdotal evidence suggests that the endogenous formation of long term relationship may help solve the problem of non-cooperative, or dishonest, behavior. As one example consider the banking industry. The banking literature speaks of “customer relationships,” suggesting that customers who prove themselves to be honest, i.e., who pay back their loans on time, are able to enter into long term relationships and borrow at a lower interest rate or borrow a larger amount. On the other hand, new customers may have to pay a higher interest rate (or borrow a smaller amount) and customers who are not current on their loans are denied credit and may have to turn to other institutions for future business and pay a higher interest rate. Thereby the promise of forming a long term relationship and enjoying higher payoffs and the punishment of severing a relationship, entering into a pool of incognitos, and suffering low payoffs induces borrowers to behave honestly. The model we construct and analyze in this paper delivers these features in a game theoretic setting. More specifically, the setting we consider consists of three elements. The first element is that relationships are constantly reshuffled, i.e., individuals interact with varying opponents over time. This reshuffle is partly exogenous, i.e., induced by exogenously imposed separations and partly endogenous, i.e., induced by individuals’ decisions whether to continue interacting with the same partner or seek a new partner. This implies that the choice of a partner and the longevity of a partnership are, to some extent, endogenous. The second element is that individuals play a prisoner’s dilemma game and are able to observe their partner’s behavior within the relationship (but not his behavior in previous relationships with other agents). Thereby individuals are able to condition their continuation vs. separation decision on that behavior. In particular an individual can leave a partner who cheats her. Conversely, an individual can induce her partner to stay and form a long-term relationship by being honest. The third element of our model is that individual players are of different types. Some players (called good)

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

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

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

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

This paper asks to what extent distortions to the adoption of new technology cause income inequality across nations. We work in the framework of embodied technological progress with an individual, C.E.S. production function. We estimate the parameters of this production function from international data and calibrate the model, using U.S. National Income statistics. Our analysis suggests that distortions account for a bigger portion of income inequality than hitherto has been assessed.

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

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