The theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents. By contrast, we consider a market in which one firm is the current incumbent, while the remaining firms are challengers. Moreover, we consider a sequence of innovations, so that success does not imply that the successful firm reaps monopoly profits forever after, but only until the next, better innovation is developed. We begin with a fully optimizing behavioral model and derive the equivalent of the Schumpeterian “process of creative destruction.” That is, a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger. The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process…The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates [Schumpeter, 1942, pp. 82–83

James C. Van Horne, Of Financial Innovations and Excesses, The Journal of Finance, Vol. 40, No. 3, Papers and Proceedings of the Forty-Third Annual Meeting American Finance Association, Dallas, Texas, December 28-30, 1984 (Jul., 1985), pp. 620-631

Reviews the book "Creative and Innovative Management: Essays in Honor of George Kozmetsky," edited by A. Charnes and W.W. Cooper

In his 1983 paper, Jeremy Siegel derives a seemingly implementable policy rule involving optimal responses to interest rates. The existence of such a rule would be of tremendous interest to central banks whose monetary policies place heavy weight on responses to interest rates. The Siegel rule is especially appealing because it is (i) an optimal combination policy in the sense of William Poole (1970), and (ii) the proposed implementation of the rule does not require detailed knowledge of the structure of the economy. All that is required is a calculation of the covariance between innovations in prices and interest rates. Within the confines of a rational expectations equilibrium model, in which Siegel assumes agents do not make use of information embodied in the current nominal interest rate, he is able to design an optimal combination policy that does not require detailed information about the economy. That such an optimal policy exists is not new, but that it can be easily implemented is novel.' The policy rule depends solely on the covariance between innovations in the aggregate price level and innovations in the nominal rate of interest, normalized by the variance of innovations in the interest rate. When this index is zero, policy has been set optimally. When the index is positive the feedback term on interest rates in the money supply rule is too large, and when the index is negative the feedback term is too small. Given that one can obtain reduced-form expressions for prices and interest rates, the index is easily computed. Unfortunately, Siegel's proposal violates Robert Lucas's (1976) critique. That is, he implicitly treats as invariant certain aspects of economic behavior that will generally change when one moves to an operational interest rate This note shows in detail that in a model where prices are flexible and agents observe local market prices (i.e., the model at least employed verbally by Siegel), that the coefficients in the aggregate supply and demand functions are not invariant to the form of the money supply rule. This lack of invariance will cause Siegel's rule to be nonoperational. The sensitivity of parameters in aggregate supply functions to policy is not restricted to equilibrium models with flexible prices. This property also extends to contracting models with endogenous indexing (see, for example, Jo Anna Gray, 1976). Therefore, Siegel's rule will not be implementable in a wide variety of commonly used macro models

If a firm does not know the individual ex post outside opportunities of its contracted workforce, then it can use hours, wages, and redundancy payments to screen them. Will a second-best contract have underemployment inefficiency, or overemployment? And, with a stochastic contract, are those workers randomly selected for layoff worse off than their retained colleagues (involuntary layoff), or vice versa (involuntary retention)? The answers depend on the nature of the workers' preferences. Two polar cases are looked at, corresponding to permanent and temporary layoff. The former is characterized by overemployment and involuntary retention; the latter by underemployment and involuntary layoff. Also examined are “simple contracts” where all retained workers are paid a common wage and all laid-off workers receive a common redundancy payment. Handling asymmetric information in stochastic contracts has led to two technical innovations. First, a number of results are proved even though all the truth-telling constraints are explicitly included. Second, a new regularity condition is found under which the local constraints are sufficient to ensure global incentive compatibility at an optimum

One of the largest bodies of literature in the field of industrial organization is devoted to the interpretation and testing of several hypotheses advanced by Joseph Schumpeter (1950) concerning innovation and industrial market structure. One set of hypotheses focuses on the role of firm size as a determinant of R&D spending and the rate of technological advance. Another set focuses on the effect of market concentration on R&D and technological advance. In this paper, we reexamine the latter set of hypotheses at the industry level, using new data on R&D appropriability and technological opportunity collected by Levin et al. (1984) in a survey of R&D executives in 130 industries

This paper reviews selected theoretical and empirical developments in the field of labor migration economics. The migration behavior of individuals differs in accordance with their perceived relative deprivation; those who are relatively more deprived tend to have stronger incentive to migrate than those who are relatively less deprived. Moreover a reference group characterized by more income inequality is likely to generate more relative deprivation. Highly skilled workers are also more likely to migrate. Migration decisions are often made jointly by the migrant and nonmigrant with a contractual arrangement regarding the sharing of costs and returns. The exchange of commitments to share income provides coinsurance. Of particular interest are the determinants of the speed of adoption of migration as an innovation and the characteristics associated with the delay in the adoption of innovation. New econometric techniques including techniques for the analysis of qualitative dependent variables techniques that correct for sample selection bias and those for the analysis of longitudinal data have substantially benefited empirical research in this area. New methods that can correct for the biased estimate of the wages particular individuals would receive at 2 or more locations at the same point in time allow researchers to test locational decsion making models. Estimates of these structural models of labor migration support the hypothesis that individuals respond to income incentives in making the decsion to migrate. Further research is needed on the pazzling observation that migrant workers earn less than native-born workers with similar characteristics during the 1st few years after migration but more thereafter. Other topics that need further research include the macroeconomic effects of migration the microeconomic and macroeconomic relationships between aging and labor migration and the migration behavior of dual-earner families

This paper reexamines both monthly and quarterly U.S. postwar data to investigate if the observed comovements between money, real interestrates, prices and output are compatible with the money-real interest-output link suggested by existing monetary theories of output, which include both Keynesian and equilibrium models.The major empirical findings are these;1) In both monthly and quarterly data, we cannot reject the hypothesis that the ex ante real rate is exogenous, or Granger-causally prior in the context of a four-variable system which contains money, prices, nominal interest rates and industrial production.2) In quarterly data, there is significantly more information con-tained in either the levels of expected inflation or the innovationof this variable for predicting future output, given current and lagged output, than in any other variable examined (money, actualinflation, nominal interest rates, or ex ante real rates). The effect of an inflation innovation on future output is unambiguously negative. The first result casts strong doubt on the empirical importance of existing monetary theories of output, which imply that money should have a causal role on the ex ante real rates. The second result would appear incompatible with most demand driven models of output.In light of these results, we propose an alternative structural model which can account for the major dynamic interactions among the variables.This model has two central features: i) output is unaffected by money supply;and ii) the money supply process is motivated by short-run price stability

The paper measures the rate of growth of average labor cost and the real wage for the twenty U.S. two digit manufacturing industries 1948-76. It is argued that these rates of growth give interesting information which other studies on the real wage ignore. The results suggest that the gains from technical advance are shared equally across all labor markets, consistent with the competitive paradigm. A simple and appealing rationale for the observation that high growth industries show the slowest relative rate of growth of prices is also given. T HE General Theory (Keynes, 1936) unleashed many controversies. One of the earliest and still topical controversy is the cyclical behavior of the real wage. Essentially the real wage-employment debate has focussed on whether or not the demand schedule slopes downwards and there have been many studies on this topic, producing a variety of conflicting findings.' A common feature of the real wage-employment studies is to abstract away from the growth in the real wage that is bound to occur in a growing economy. These studies are primarily concerned with deviations from trend or innovations in the real wage and the theme of this paper is that to ignore the growth in the real wage is to throw away valuable and interesting information. This information on real wage growth tells us a great deal about competition in the labor market. This study should be seen as being complementary, rather than conflicting, with the real wage-employment studies. The existence of a downward sloping demand curve for labor is, after all, not sufficient (and probably not necessary) for the functioning of competitive labor markets. Over the span of years 1948-76, I find that individual U.S. manufacturing industries record widely varying rates of productivity growth. However, these same industries tend to show a common rate of growth of the real wage. This feature of productivity growth was emphasized by the late Salter (1960) in his pathbreaking analysis of technical change. He writes, There is no tendency for above-average increases in labour productivity to be accompanied by above-average increases in earnings