Model Of Firm Behavior Research Articles

Government as a Landscape Designer: A Behavioral Perspective on Industrial Policy

While the strategic management literature has built rich, behaviorally plausible models of firm behavior, the industrial policy literature has typically assumed neoclassical firms. By bridging thes...

A model of firm behaviour with bankruptey costs and imperfectly informed lenders

Based on Greenwald and Stiglitz (1988, 1990), this work explores a simple model of microeconomic behaviour that incorporates the impact of asymmetric information in capital markets on firms’ optimal investment decision rules. Starting from a model of equity-constrained firms, where expected bankruptcy costs (reflecting each firm’s quality) imply a higher user cost of capital and, thus, a lower investment by each firm, we move to a context of adverse selection in the debt market, where banks offer a ‘onesize-fits-all’ contractual interest rate. This implies that ‘poor’ firms tend to invest more vis-à-vis ‘good’ firms, since they now take into account that higher expected default rates may not be matched by comparably higher contractual interest rates, therefore weakening the impact of bankruptcy costs on firms’ investment decisions.

Economic-ecological evaluation of temporary biodiversity offsets in Alberta's boreal forest

SUMMARYTo conserve biodiversity on forest landscapes, it is necessary to understand how incentives in an offset market affect the dynamics of habitat loss and restoration. In this study, a model of firm behaviour in a temporary biodiversity offset market is developed to understand the impact of offset rules on the dynamics of land use and offset policy costs and benefits for Alberta's boreal forest. Policy treatments include eligibility rules for restoration versus avoided loss; time lags for crediting restoration benefits; and geographic trading restrictions. The analysis highlights the assumptions and trade-offs embedded in offset principles such as additionality. Restoration-based policies, which require biodiversity benefits to be established prior to development, are over 200 times more costly than policies that include avoided loss. Geographic trading restrictions result in a significant redistribution of policy costs and ecological risks between regions, with little impact on aggregate policy costs and benefits. Including avoided loss results in a decline in biodiversity intactness by 2% to 2.2% compared to a decline of 3.6% under a no-offset policy. Increasing time lags for crediting restoration to match ecological recovery trajectories reduces restoration effort when policies include both restoration and avoided loss.

The capital structure of a firm under rate of return regulation: durability and the yield curve

I present a generalized dynamic model of firm behavior under rate of return regulation. The modeled firm has access to multiple types of capital which are substitutes (imperfect or perfect) in production. These capital inputs are differentiated based on durability and heterogeneous marginal effects on the firm’s total cost of capital. This approach is kept general but is motivated by the stylized shape of the bond yield curve, wherein high-durability (longer lived) assets command a higher required return on investment (higher bond yield). The results indicate that a regulated firm (relative to an unregulated firm) will over or under-invest in specific assets depending on their durability and the size of the assets’ marginal effects on the cost of capital relative to the regulated rate of return. Two specific sources of distortion in the capital structure are identified. The “yield curve” effect pushes the firm further (relative to the unconstrained case) towards assets with a low marginal contribution to the cost of capital, thus reducing the firm’s average cost of capital. The “duration” effect pushes the firm towards longer lived assets as a means to inflate the steady state capital stock. This is similar to (yet distinct from) the classic Averch and Johnson (Am Econ Rev 52(5):1052–1069, 1962) result.

The Law and Economics of the FCC's Transaction Review Process

This article assesses the FCC’s current policies and rules regarding transaction reviews, concluding that the Commission’s current spectrum transfer review process harms consumer welfare. In particular, the FCC’s spectrum screen as currently structured, its standard of review for spectrum transfers, its use of conditions, as well as the scope of its transaction reviews exceed legal limits, impede efficient markets for spectrum, and deter welfare-increasing transactions and investment.First we explain the FCC’s current policies and decisions regarding transaction reviews and assess their appropriateness with respect to the Commission’s authorizing legislation, regulations and case law. With respect to the scope of its transaction reviews and its use of conditions in particular, we find that the FCC’s practices exceed their permissible limits. Next we address the economics of the FCC’s policies and decisions, explaining and assessing the animating economic logic behind the FCC’s actions. We demonstrate that the FCC’s current spectrum screen and transaction review standards rest on the premise that spectrum concentration in markets inherently leads to anticompetitive behavior. Further, we explain the flaws in this premise. In demonstrating and assessing the basis of the FCC’s transaction reviews, we discuss the particulars of the FCC’s spectrum screen in detail, focusing on its use of concentration metrics and claims that its full analysis (beyond the initial screen) investigates competitive conditions more broadly. As we discuss, the Commission uses HHIs and spectrum concentration measures improperly as de facto triggers for per se illegality, rather than triggers for further investigation. Further, none of the full analyses described by the Commission investigates an aspect of competition other than market or spectrum concentration; instead, they simply restate in more detail the structural analysis implied by the HHI test and spectrum screen.Addressing the economics underlying the FCC’s actions, we demonstrate that both economic theory and evidence indicate that the presence of more competitors in telecommunications markets does not necessarily result in lower prices and better service for consumers. Particularly in industries (like wireless) that are characterized by rapid technological change, non-horizontal competitive constraints and shifting consumer demand, the threat of entry and the need for repeated contracts with input providers with market power operate to constrain strategic behavior, even in heavily concentrated markets. The welfare effects of spectrum concentration are at worst ambiguous, and, as we demonstrate, as the market has grown more concentrated, investment, coverage and product diversity have increased while prices for consumers have decreased. These results are consistent with a more robust model of firm behavior in the industry that takes account of entry threats and technological change. Next we undertake a detailed critique of the FCC staff's analysis of the AT&T/T-Mobile merger, demonstrating that it exhibits the same flaws as the agency's more cursory transaction reviews.We conclude with a discussion of the policy implications and suggestions for reform.

Impact des incitations à l’investissement du gouvernement fédéral canadien dans le secteur manufacturier, de 1965 à 1974

The Canadian federal government calls upon substantial fiscal incentives between 1965 to 1974 to increase the flow of capital expenditures in the manufacturing sector, in order to reduce regional disparities, to alleviate an excessive unemployment rate and to insure a higher growth rate. The objective of our research is to evaluate the effectiveness of these incentives in inducing larger investment expenditures. We use econometric investment functions based on neoclassical and "hybrid" models of firm behavior, applied to Canadian yearly manufacturing time series from 1946 to 1974. The neoclassical and hybrid models agree that the incentives have a substantial impact during the years 65-69; and a marginal impact during the 69-74 years. The neoclassical model explains the marginal impact of incentives in the 69-74 period by a displacement through time of investment projects; there is an acceleration-deceleration effect attributed to the incentives. Investment expenditures of the 69-74 period are submitted to an upward pressure because of the 69-74 incentives, and to a downward pressure because of a deceleration effect associated with the 65-69 incentives. We conclude that the incentives are effective in the short run in stimulating investment expenditures (the mean lag of their impact is approximately eighteen months) but that an acceleration-deceleration effect shows up after three years.

Advertising and Steiner’s Dual Stage Model: Our Assessment

Between 1967 and 1979, we produced a number of studies that explored different facets of the economics of advertising. This work culminated in our 1974 book entitled Advertising and Market Power. Our leading hypothesis was that heavy advertising expenditures often but not always had anti‐competitive effects. And our primary empirical evidence in support of this hypothesis was that industries with heavy advertising expenditures also reported higher profit rates, which we interpreted as indicating that higher prices followed when manufacturers can effectively spend large amounts on advertising. Since that time, Robert Steiner has developed a model of firm behaviour for consumer goods industries. He finds that distribution margins are generally higher where manufacturer prices are lower. Furthermore, heavy manufacturer advertising is likely to depress distribution margins for heavily advertised products. While our earlier work implicitly assumed that distribution margins are generally the same regardless of the volume of advertising, Steiner’s results raise doubt on this assumption. Steiner’s model must therefore be acknowledged when interpreting our earlier findings.

R&D Costs and Returns by Therapeutic Category

ObjectivesThis study examines the degree to which therapeutic class accounts for variability in drug development costs. It also scrutinizes how sales levels vary across the associated therapeutic classes for those drugs that have reached the marketplace.Data and MethodsA stratified random sample of 68 investigational drugs that first entered clinical testing anywhere in the world from 1983 to 1994 was selected from the pipelines of 10 pharmaceutical firms. Clinical period cost data were obtained for these compounds by phase. The sample consisted both of drugs that failed in testing and drugs that obtained marketing approval. We grouped the drugs by therapeutic category. Clinical period costs per approved new drug (inclusive of failures) were obtained for the analgesic/anesthetic, antiinfective, cardiovascular, and central nervous system (CNS) therapeutic classes. Worldwide sales profiles for new drugs approved in the United States from 1990 to 1994 over a 20-year product life cycle were computed based on IMS Health sales data. All costs and sales were expressed in year 2000 dollars.ResultsOut-of-pocket clinical period cost per approved drug (inclusive of failures) for cardiovascular ($277 million) and CNS ($273 million) drugs was close to the overall average ($282 million). However, antiinfective drug costs were considerably above average ($362 million) and analgesic/anesthetic drug costs were modestly below average ($252 million). The results were qualitatively similar when the development timelines were used to determine capitalized (out-of-pocket plus time) costs. In comparison to the overall average of $466 million, the capitalized cost per approved drug was slightly lower for CNS ($464 million) and for cardiovascular ($460 million) drugs. The capitalized costs were $375 million for analgesic/anesthetic drugs and $492 million for antiinfective drugs. The mean net present values of life cycle sales for new drugs approved in the first half of the 1990s were $2434 million, $ 1080 million, $2199 million, $3668 million, and $4177 million for all drugs, analgesic/anesthetic drugs, antiinfective drugs, cardiovascular drugs, and CNS drugs, respectively.ConclusionsDevelopment costs vary substantially from drug to drug. A drug’s therapeutic class can explain some of that variability. The sales of new drugs by broad therapeutic category did not correlate well with average development costs. However, given the dynamic nature of pharmaceutical markets and changes over time in research and development (R&D) expenditure shares, the results are still consistent with a model of firm behavior that posits that R&D efforts will generally shift toward high net return, and away from low net return, therapeutic areas.

Eco-innovations and industrial organisation: a review of complementary explanations of unsustainable economic paths

Technological "lock-in" is a form of macrolevel "network" externality and thus a form of market failure. What it can imply is that firms in an industry maintain (and replace) capital stock which is technologically sub-optimal because of "quasi-irreversibilities": it is only privately optimal for one firm to shift its technological base if other firms in the industry follow suit. This form of externality is radically different to the conventional microlevel pollution externality. This research explores the possibility that production is "locked into" practices that are unsustainable and polluting due to macrolevel quasi-irreversibilities and due to the micro (firm) process of "searching" for social and environmental innovations. As such, the research develops an evolutionary economic conceptual model of firm behaviour and considers the implications of this model for the long-term competitiveness and sustainability of industry.

The Dynamic Effects of Firm-Level Borrowing Constraints

In this paper, I develop a detailed dynamic model of firm behavior in order to see whether financial constraints and endogenous exit are important propagation mechanisms.To do this, I construct an economy where firms face financial constraints, fixed costs, and persistent idiosyncratic shocks. Using numerical methods, I analyzehowa large collection of these firmsresponds to aggregate productivity shocks. A common result is that financial constraints tend to dampen the economy's initial response to aggregate productivity shocks but equity accumulation and exit dynamics amplify the longer-term response. The relative sizes of these two effects, however, are sensitive to firms' environments.

Empirical Implications of Alternative Models of Firm Dynamics

This paper considers two models of firm behavior that allow for heterogeneity among firms, idiosyncratic (or firm-specific) sources of uncertainty, and discrete outcomes (exit and/or entry). Both the characteristics of firm level panel data sets and the nature of the questions we characteristically ask of them imply that models with these features are likely to underlie most detailed empirical work on microdata sets. The models we consider are a Bayesian learning model due to Jovanovic [20], and a model of research and exploration due to Ericson and Pakes [11]. The paper provides a simple set of empirical procedures to help determine which, if either, of these two models might be appropriate for alternative data sets. We conclude by checking for the implications of the two models on an eight-year panel of Wisconsin firms. The results indicate that one model is consistent with the data on manufacturing firms while the other is consistent with the data on retail trade.Journal of Economic LiteratureClassification Numbers: C52, L60, L80.

Input and Output Inventories

This paper builds and estimates a new model of firm behavior that includes decisions to order, use and stock input materials in a stage-of-fabrication environment with either gross production or value added technology. The model extends the traditional linear-quadratic model of output (finished goods) inventories by incorporating delivery and usage of input materials plus input inventory investment--features which largely have been ignored in the literature. Stylized facts indicate that input inventories are empirically more important than output inventories, especially in business cycle fluctuations. Firms simultaneously choose input and output inventories; thus, the model exhibits feedback between stocks induced by dynamic stage-of-fabrication linkages. Estimation of inventory decision rules shows the model is reasonably consistent with data in nondurable and durable goods industries. The results reveal inventory stock interaction, convex costs and viability of gross production and value added specifications, industrial differences and input inventory-saving technology.

Product differentiation and cartel stability: Chamberlin versus Hotelling

This paper contrasts the implications, for cartel stability, of the non-spatial (‘Chamberlinian’) and the spatial (‘Hotelling’) models of product differentiation. Using the special case of a linear demand framework, we show that whereas the former approach suggests that cartel stability is non-monotonic but predictable in the degree of differentiation, the outcome is very much more ambiguous when the latter formulation is employed. We examine also the implications for stability when demand shocks occur, and show that even in the case of linear demand, when differentiation is modelled in spatial terms the results are consistent with non-linear non-spatial demand functions, as well as with those obtained in more complicated models of firm behaviour.

TOWARDS AN ATTENTION‐BASED VIEW OF THE FIRM

The central argument is that firm behavior is the result of how firms channel and distribute the attention of their decision-makers. What decision-makers do depends on what issues and answers they focus their attention on. What issues and answers they focus on depends on the specific situation and on how the firm's rules, resources, and relationships distribute various issues, answers, and decision-makers into specific communications and procedures. The paper develops these theoretical principles into a model of firm behavior and presents its implications for explaining firm behavior and adaptation. ? 1997 by John Wiley & Sons, Ltd.

Factor supply interruption, welfare loss and shortage management

Factor supply shortage is a common problem faced by a firm. Solutions for allocating the limited supply include rationing, interruption and pricing. While previous research has examined the welfare losses generated by each solution, there is little evidence on their relative magnitudes within a common framework. The objective of this paper is to specify a model of firm behaviour under service interruption to estimate the welfare loss of service interruption. The same model is used to estimate the loss due to a price increase intended to resolve a supply shortage. Using water consumption data collected for Hong Kong, we find that relative to pricing, service interruption is inefficient for water shortage management.

The importance of seasonality in inventory models: Evidence from business survey data

The importance of seasonality in inventory models is examined using categorical data from a survey of Swiss manufacturing firms. Survey responses concerning expected new orders and production allow us to directly examine whether firms use inventories to smooth seasonal movements in demand without making strong assumptions concerning a model of firm behavior. We also investigate the importance of seasonality in estimated reduced formrelationships for firm production plans, and compare self-seasonal adjustment procedures, where firms are asked to correct their responses for seasonality, with statistical adjustment procedures that are analogous to dummy variable procedures. The results suggest seasonality does not play a significant role in the production and inventory decisions of Swiss manufacturing firms.

Unemployment Insurance Taxes and Cyclical Layoff Incentives

When unemployment insurance (UI) taxes are incompletely experience rated, a self-financing UI system has to impose additional taxes that are exogenous to the behavior of individual firms. In the United States, these nonrated tax components vary predictably over the business cycle. A model of firm behavior under such a tax is presented. Evidence suggests signs for the parameters of the model that predict that incomplete experience rating, while (as shown elsewhere) increasing the rate of temporary layoffs, leads to the use of multiple tax schedules in a way that exerts downward pressure on cyclical swings in aggregate unemployment.

SCARCITY AND RICARDIAN RENTS FOR CRUDE OIL*

This paper estimates scarcity rent/user cost and Ricardian rent for crude oil in Oklahoma. A model of firm behavior is proposed incorporating both development and production decisions considering crude oil as a nonrenewable natural resource. Profit maximization conditions derived from the model are applied to take into account cost differentials associated with oil found at varying depths. It is shown that oil with the highest cost is the marginal unit and it is the marginal output that determines Ricardian rent. Time series data is used to estimate equations derived from the necessary conditions. It is found that scarcity rent is a significant proportion of the price of crude oil and has increased in the past decade.

Technology Strategy and Industrial Relations: Case Studies of Japanese Multinationals in the United States

Eight case studies of U.S. manufacturing subsidiaries of Japanese multinationals are analyzed in terms of variations in competitive strategies and industrial relations practices. Based on data collected in 1980 during on-site visits, each firm is reviewed in light of the technology contributions coming from the Japanese parent and is categorized as having product-, process-, and/or management-centered technology strategies. The industrial relations practices are also grouped according to similarities observed. These groupings are then compared and contrasted. The findings are consistent with hypotheses that firms with management-centered strategies are more likely not to be unionized and to oppose unionization, to prefer a less stratified work force in terms of number of job classifications and specifically identified job assignments, to maintain flexibility in work-force management, to conduct considerable cross-training and to strive to avoid layoffs of production personnel. Conversely, the groupings indicated little relationship, if any, between technology strategy and compensation levels. The findings are interpreted in light of product-life-cycle and risk-aversion models of firm behavior. The question of whether technology strategy is a reasonably good predictor of industrial relations practices is also addressed.

Aggregate Investment and Consistent Intertemporal Technologies

It is frequent practice to model an industry or economy as if it were a single agent solving a single optimization problem. A model of firm behavior which has had extensive use as an aggregative model is the adjustment cost model of investment. We assume there are a number of competitive firms in an industry that choose investment paths to maximize their present value; the technologies of the firms exhibit capital stock adjustment costs. For general concave technologies of the firms, there is no aggregate concave technology that can represent the technological possibilities available to the industry. We find conditions on the technologies of the firms that are necessary and sufficient for the existence of an aggregate technology that can consistently model the industry's behavior and discuss their empirical implications.