Private Incentives Research Articles

Profiting from Innovation: Firm Level Evidence on Markups

While innovation is argued to create value, private incentives of …rms to innovate are driven by what part of the value created …rms can appropriate. In this paper we explore the relation between innovation and the markups a …rm is able to extract after innovating. We estimate …rm-speci…c price-cost margins from production data and …nd that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the …rm to appropriate returns from innova

Engagement Motivations in Professional Associations

This article follows Knoke in exploring how public incentives offered by professional associations (such as lobbying on behalf of collective interests) compete with private incentives (such as member networking opportunity) in promoting monetary gifts, voluntary coproduction of organizational outcomes, and commitment to the association. Olson’s contention that public goods do not motivate civic engagement has fostered several decades of research geared toward establishing the role of such goods in associational outcomes. Based on membership surveys of three engineering associations and two health care associations, the study concludes that private incentives are not universal motivators, while public incentives show some evidence of motivating engagement. Unexpected differences between the two fields of professional association are striking, prompting suggestions that current practitioners and future research give attention to field differences and resist overgeneralization regarding engagement motivations, outcomes, and commitment across professional fields.

The control of invasive species on private property with neighbor-to-neighbor spillovers.

Invasive pests cross property boundaries. Property managers may have private incentives to control invasive species despite not having sufficient incentive to fully internalize the external costs of their role in spreading the invasion. Each property manager has a right to future use of his own property, but his property may abut others' properties enabling spread of an invasive species. The incentives for a foresighted property manager to control invasive species have received little attention. We consider the efforts of a foresighted property manager who has rights to future use of a property and has the ability to engage in repeated, discrete control activities. We find that higher rates of dispersal, associated with proximity to neighboring properties, reduce the private incentives for control. Controlling species at one location provides incentives to control at a neighboring location. Control at neighboring locations are strategic complements and coupled with spatial heterogeneity lead to a weaker-link public good problem, in which each property owner is unable to fully appropriate the benefits of his own control activity. Future-use rights and private costs suggest that there is scope for a series of Coase-like exchanges to internalize much of the costs associated with species invasion. Pigouvian taxes on invasive species potentially have qualitatively perverse behavioral effects. A tax with a strong income effect (e.g, failure of effective revenue recycling) can reduce the value of property assets and diminish the incentive to manage insects on one's own property.

Informational Feedback, Adverse Selection, and Optimal Disclosure Policy

ABSTRACTFaceless trading in a secondary stock market not only redistributes wealth among investors but also generates information that feeds back to real decisions. Using this observation we re‐evaluate the “leveling‐the‐playing‐field” rationale for disclosure to secondary stock markets. By partially preempting traders' information advantage established from information acquisition, disclosure reduces private incentives to acquire information, resulting in two opposite effects on firm value. On one hand, this narrows the information gap between informed and uninformed traders and improves liquidity of firm shares. On the other hand, this reduces the informational feedback from the stock market to real decisions. This tradeoff determines the optimal disclosure policy. The model explains why firm value can be higher in an environment that simultaneously promotes disclosure and private information production and why growth firms are endogenously more opaque than value firms.

Cooperative and non-cooperative R&D and trade costs

We examine the effect of trade liberalization on the level and mode of R&D in an international duopoly setting. Firms have the choice to invest in R&D either independently or cooperatively. A reduction in trade cost increases R&D irrespective of the mode of R&D. However, an increase in spillovers has ambiguous effects on R&D. More precisely, we find that an increase in spillover leads to higher R&D activity under cooperation but lower R&D activity under non-cooperation. Concerning cooperation versus non-cooperation, we find that firms prefer cooperation only if trade costs are low. Consumers are better off under cooperation if spillovers are high. We find that there can be a mismatch between private and social incentives. If spillovers are low and trade costs are low then cooperation might be privately profitable but socially undesirable. On the other hand, if there are large spillovers and high trade costs then cooperation may be socially desirable but not privately profitable.

An Ethics-Based Solution to Misappropriation's Copyright Problem

Concern about free-riding drives intellectual property law, especially its misappropriation doctrine. Freely enjoying goods that are costly to produce may be bad for society as a whole (because it weakens private incentives to create such goods) and also unfair to those who have created them (because they are not compensated for all the value they produced). In recent decades, courts in misappropriation disputes have focused exclusively on the incentives worry, believing the fairness worry yields an unbounded misappropriation doctrine that conflicts with and is preempted by copyright law. But this view misunderstands the morality of free-riding. Whether free-riding is morally objectionable depends on the particular characteristics of the free-rider, not the fact of free-riding alone. And under copyright case law, that means the misappropriation doctrine can be based on ethics and yet not preempted. A better understanding of free-riding’s moral dimensions helps repair a now broken doctrine, and more than that shores up intellectual property law’s broader response to one of its driving concerns.

Earth Orbit Debris: An Economic Model

Space debris, an externality generated by expended launch vehicles and damaged satellites, reduces the expected value of space activities by increasing the probability of damaging existing satellites or other space vehicles. Unlike terrestrial pollution, debris created in the production process interacts with rms’ nal products, and is, moreover, self-propagating: collisions between debris or extant satellites creates additional debris. We construct an economic model to explore private incentives to launch satellites and to mitigate space debris. The model predicts that, relative to the social optimum, rms launch too many satellites and under-invest in debris mitigation technologies. We discuss remediation strategies and policies, and calculate a socially optimal Pigovian tax.

What Changes Energy Consumption, and for How Long? New Evidence from the 2001 Brazilian Electricity Crisis

There is little evidence from impact evaluation studies of ambitious residential energy conservation programs, especially in developing countries. In this paper, I investigate the short{ and long{term impacts of the most ambitious electricity conservation program to date. This was an innovative program of private incentives and conservation appeals implemented by the Brazilian government in 2001{2002 in response to supply shortages of over 20%. I nd that the program reduced average electricity consumption per customer by 25% over a nine{month period in aected areas. Importantly, the program reduced consumption by 12% in the long

A Note on Private versus Social Incentives to Sue in a Costly Legal System

This article presents a game-theoretic model of costly litigation. The model shows that where an injurer can calibrate the level of damages done to other parties, it sacrifices in profits an amount related to the victim's litigation costs by inducing suit. Thus the structure of the legal system implicitly internalizes the costs of litigation. Whether complete internalization occurs depends on such considerations as the information of the parties and the injurer's ability to control damages precisely.

Negative and positive effects of social capital on co‐located firms' withholding efforts

PurposeThis study aims to demonstrate that the investments in social capital do not always pay off. Although an important function of social capital is its potential for influencing co‐located companies' opportunistic behavior, social capital also has a negative side. This study seeks to examine the negative and positive effects of the social capital dimensions on a company's profitability and on the perception that co‐located firms free ride and shirk.Design/methodology/approachBy including data from 224 firms in 112 true‐paired dyadic relationships, this study provides a unique and valid basis for empirical study within SEM analysis. The ability to link different information sources in the analysis creates a unique data set that controls for the confounding effects of common method biases in the analysis.FindingsMarkets with a low degree of collective activity gain less advantage from cognitive social capital, because its primary effect lies in its transparency and ability to detect opportunistic behavior. The effect of relational social capital is more stable because of the positive direct effect on profitability. Structural social capital indicates markets that would benefit from creating private incentives with the intention to transfer collective activities into private payoffs. This reduces the need to follow up the co‐localized businesses.Originality/valueThis study shows that the dimensions of social capital vary regarding whether they reduce or facilitate the perceived withholding efforts by co‐located firms.

Economics of global warming as a global public good: Private incentives and smart adaptations

AbstractThis paper critically reviews the current economic models of climate change and policy options and examines smart adaptations as an alternative policy solution based on individual incentives. A variety of the models based on negative externality as well as catastrophe models of global warming are reviewed. This paper finds that the current models fail to account for disparate regional and private incentives under changing climates. We introduce the theory of the global commons (public goods) to illuminate the conflicts between individuals and the global objective. Smart adaptations are those that reduce the damage from global warming but also mitigate greenhouse gases at the same time. They are motivated by individuals, but supported by the public sector. Smart adaptation strategies include natural resource uses, land use changes, consumer actions, migration, population changes, alternative energy sources and technological advances. This paper discusses whether smart adaptations are sufficient to prevent climate catastrophe.

Public Expenditures, Private Incentives, and Technology Adoption: The Economics of Hybrid Rice in South Asia

The rapid expansion of hybrid rice cultivation in China has contributed significantly to improving food security in the country since the 1980s. However, few other Asian countries have seen similar expansions in hybrid rice cultivation or the associated yield and output gains. This paper examines the technical challenges, market opportunities, and policy constraints related to hybrid rice in South Asia, with specific emphasis on India and Bangladesh. The paper sets the discussion within a novel analytical approach to agricultural science, technology, and innovation that focuses on improving the efficiency with which new technologies are transformed into economically relevant products and services.

The Influence of Environmental Reputation Asymmetry Size on Alliance Performance

Strategic alliances between firms with different reputation levels are not uncommon. Whilst prior studies have identified private incentives and disincentives of allying with higher or lower reputa...

Can Firms Build Capital-Market Reputation to Compensate for Poor Investor Protection? Evidence from Dividend Policies

The existing literature on law and finance generally assumes that firms are passive recipients of the influence of investor protections on their ability to raise external financing. This view ignores the role of private incentives. In this paper, we empirically identify a commitment mechanism, i.e., dividend payouts, which firms use to establish a reputation for better treatment of outside shareholders in order to compensate for country-level weak protection of shareholders and to obtain better access to equity markets. We show that, in weak-protection countries, firms with growth prospects tend to initiate dividends earlier and pay a higher level of dividends not only as compared to their counterparts in strong protection countries but also as compared to low-growth firms in the same legal regime. As evidence of better access to capital markets, in weak-protection countries, growth firms with a good dividend history (e.g., three years of consistently high dividend payouts) attain higher stock market valuation and raise more equity financing.

Regime Vulnerability and the Diversionary Threat of Force

In this article, I move beyond prior efforts to explore the relationship between the risk of a coup and international conflict by considering alternatives that leaders can utilize to strengthen their regimes. I offer two theoretical expectations. First, I theorize that leaders lose the incentive and ability to use diversion when the structural coup-proofing apparatus is strengthened. Second, I expect military finances to lead to disparate behavior when considering regime type. Autocrats are expected to use military funds to provide private incentives to the armed forces, largely in the form of allowances. Democracies, in contrast, will be required to use expenditures to promote the public good of national security due to the transparency of their regimes. Autocrats are expected to lose the incentive to use diversion as the financial endowment of their militaries increase, while democracies will continue to show a diversionary trend due to their increased military capabilities. The theory is tested using global data from 1962 to 2000, with the findings strongly supporting the theory.

Private and Public Incentive to Reduce Seasonality: A Theoretical Model

AbstractIn this article, the authors present a theoretical model to investigate the private and social incentives to reduce seasonality in a given market. They assume that consumers derive different utilities from the consumption of the same good in different seasons. The seasonal product differentiation is modelled along the lines of Gabszewicz and Thisse (Price Competition, Quality and Income Disparities, 1979) and Shaked and Sutton (Relaxing Price Competition through Product Differentiation, 1982). The authors assume that it is possible for a firm to invest in order to reduce the degree of the demand seasonality. They show that, for a wide set of parameter configuration, the optimal effort to reduce seasonality is higher from a social welfare perspective, as compared to the private producer perspective. The tourism market can represent an application of the present model. However, unlike most available literature in this field, their model provides a microeconomic basis for the evaluation of investments aimed at reducing seasonality, rather than taking a macroeconomic approach.

Nonlinear Effects of Taxation on Growth

We propose a model consistent with two observations. First, the tax rates adopted by different countries are generally uncorrelated with their growth performance. Second, countries that drastically reduce private incentives to invest severely hurt their growth performance. In our model, the effects of taxation on growth are highly nonlinear. Low tax rates have a very small impact on long-run growth rates. But as tax rates rise, their negative impact on growth rises dramatically. The median voter chooses tax rates that have a small impact on growth prospects, making the relation between tax rates and economic growth difficult to measure empirically.

Private Manufacturersʼ Thresholds to Invest in Comparative Effectiveness Trials

The recent rush of enthusiasm for public investment in comparative effectiveness research (CER) in the US has focussed attention on these public investments. However, little attention has been given to how changing public investment in CER may affect private manufacturers' incentives for CER, which has long been a major source of CER. In this work, based on a simple revenue maximizing economic framework, we generate predictions on thresholds to invest in CER for a private manufacturer that compares its own product to a competitor's product in head-to-head trials. Our analysis shows that private incentives to invest in CER are determined by how the results of CER may affect the price and quantity of the product sold and the duration over which resulting changes in revenue would accrue, given the time required to complete CER and the time from the completion of CER to the time of patent expiration. We highlight the result that private incentives may often be less than public incentives to invest in CER and may even be negative if the likelihood of adverse findings is sufficient. We find that these incentives imply a number of predictions about patterns of CER and how they will be affected by changes in public financing of CER and CER methods. For example, these incentives imply that incumbent patent holders may be less likely to invest in CER than entrants and that public investments in CER may crowd out similar private investments. In contrast, newer designs and methods for CER, such as Bayesian adaptive trials, which can reduce ex post risk of unfavourable results and shorten the time for the production of CER, may increase the expected benefits of CER and may tend to increase private investment in CER as long as the costs of such innovative designs are not excessive. Bayesian approaches to design also naturally highlight the dynamic aspects of CER, allowing less expensive initial studies to guide decisions about future investments and thereby encouraging greater initial investments in CER. However, whether the potential effects we highlight of public funding of CER and of Bayesian approaches to trial design actually produce changes in private investment in CER remains an empirical question.

Responses to Risk – The Role of Policy and Compensation Schemes Les réponses au risque – Le rôle des politiques et des systèmes d’indemnisation Reaktionen auf das Risiko – die Rolle von Politik und Entschädigungsprogrammen

summaryResponses to Risk – The Role of Policy and Compensation SchemesLivestock diseases can spread quickly and cause very high losses, which has prompted public policy response, including the use of compensation. There is no generic and optimal system of compensation, but the scope and modalities of these policies and the implications for public expenditure and private incentives deserve public, economic and scientific scrutiny. The rationale for government intervention is to internalise the externalities of prevention and control activities. But ‘more is not always better’ and the types of measures employed and the total cost, matter. This article provides some insights from five countries based on a recent OECD report. Compensation schemes can be purely public, such as in Canada, or based on a private–public scheme with some formal representation of the industry to facilitate the engagement of the sector. The costs covered by the compensation schemes included the full market value of destroyed animals in most countries. Cost‐sharing arrangements are an important component of compensation schemes in Australia, Germany and the Netherlands. Expenditure on compensation can be extremely onerous and needs to be disciplined, while at the same time, engaging stakeholders. International comparisons of experiences and knowledge about the costs and benefits of past outbreaks can be very helpful in designing more efficient policy responses.

ENDOGENOUS FLEXIBILITY IN THE FLEXIBLE MANUFACTURING SYSTEM

We investigate flexible manufacturing system (FMS) by using the spatial price discrimination framework of Pal (1998). The level of flexibility when producing variants is increased by increasing investment or production cost and is endogenously determined. Our result is that private incentives for increasing flexibility are excessive from the viewpoint of social welfare. We also show that allowing continuous level of flexibility like in von Ungern