Because of the inherent uncertainty, promotion of innovation critically depends on screening mechanisms to select projects. This paper studies the relationship between bureaucracy and financial constraints as two such mechanisms. The lack of commitment to hard financial constraints interferes with its ex post screening capability; ex ante bureaucratic screening is optimally chosen as a substitute. However, bureaucracy makes mistakes by rejecting promising projects and delays innovation, and the efficiency loss due to soft financial constraints increases as prior knowledge becomes worse and as research stage investment requirements become lower. In a centralized economy, bureaucracy may reduce the number of parallel projects, particularly for projects with higher uncertainties and less research stage requirements. This theory fits much of the evidence and in particular it explains why the computer industry, but not the nuclear or aerospace industries, has fared so poorly in centralized economies

This paper examines a recent financial innovation in corporate bond contracts, referred to as the clawback provision. A clawback provision in debt contracts gives the issuer an option to redeem a specified fraction of the bond issue within a specified period at a predetermined price and with funds that must come from a subsequent equity offering. We argue that issuers use clawback provisions to mitigate the wealth losses that would otherwise occur when new equity is offered. Consistent with the hypotheses, the evidence shows that bond offerings are more likely to include a clawback provision if their issuers are private, have more intangible assets, have fewer liquid assets, and are unregulated. We also estimate the price of clawback provisions and find that yield spreads on bonds with clawback provisions are a median of 86 basis points higher relative to what they otherwise would be

I consider the costs and benefits of introducing a new security in a standard framework where uninformed traders with hedging needs interact with risk-averse informed traders, Opening a new market may make everyboby worse off, even when the new security is traded in equilibrium, This article emphasizes cross-market links between hedging and speculative demands: risk-averse arbitrageurs can use the new market to hedge their positions in the preexisting security, which cart affect liquidity in the old market. More generally, the availability of such hedging opportunities will influence the strategies to which traders will direct resources.

[I consider the costs and benefits of introducing a new security in a standard framework where uninformed traders with hedging needs interact with risk-averse informed traders. Opening a new market may make everybody worse off, even when the new security is traded in equilibrium. This article emphasizes cross-market links between hedging and speculative demands: risk-averse arbitrageurs can use the new market to hedge their positions in the preexisting security, which can affect liquidity in the old market. More generally, the availability of such hedging opportunities will influence the strategies to which traders will direct resources.]

Technological innovation has reduced the effect of diabetes. Diabetic behavioral modification in the face and expectation of medical improvement should lead to improved labor market outcomes. This article uses three cross‐sectional data sets, from 1976, 1989, and 1992, to document improvements in diabetic labor market performance. Women diabetics have significantly increased their labor force participation while male diabetics have slightly reduced their participation relative to nondiabetics

Extending the approach of Bernanke and Blinder (1992), Strongin (1992), and Christiano, Eichenbaum, and Evans (1994a, 1994b), we develop and apply a VAR-based methodology for measuring the stance of monetary policy. More specifically, we develop a "semi-structural" VAR approach, which extracts information about monetary policy from data on bank reserves and the federal funds rate but leaves the relationships among the macroeconomic variables in the system unrestricted. The methodologynests earlier VAR-based measures and can be used to compare and evaluate these indicators. It can also be used to construct measures of the stance of policy that optimally incorporate estimates of the Fed's operating procedure for any given period. Among existing approaches, we find that innovations to the federal funds rate (Bernanke-Blinder) are a good measure of policy innovations during the periods 1965-79 and 1988-94; for the period 1979-94 as a whole, innovations to the component of nonborrowed reserves that is orthogonal to total reserves (Strongin) seems to be the best choice. We develop a new measure of policy stance that conforms well to qualitative indicators of policy such as the Boschen-Mills (1991) index. Innovations to our measure lead to reasonable and precisely estimated dynamic responses by variables such as real GDP and the GDP deflator

This paper analyzes a model of economic growth, with technological innovations that reduce labor requirements but raise capital requirements. The paper has two main results. The first is that such technological innovations are not everywhere adopted, but only in countries with high productivity. The second result is that technology adoption significantly amplifies differences in productivity between countries. This paper can, therefore, add to our understanding of large and persistent international differences in output per capita. The model also helps to explain other growth phenomena, like divergence or periods of rapid growth

This study quantifies the roles of national, region‐specific, and industry‐specific shocks in aggregate employment fluctuations in U.S. regions and industries. Variation among the growth rates of major regions and industries is decomposed into unobserved national, region‐, and industry‐specific components. The results reject the view that any heterogeneity in regional fluctuations is attributable to differences in industry composition. After controlling for industry mix effects, roughly 40% of the variance of the cyclical innovation in any region's growth rate is particular to that region. In addition, region‐specific shocks appear to propagate across regions over time

An increase in the size (scale) of an economy increases the total quantity of rents that can be captured by successful innovators, which, in equilibrium, should lead to a rise in innovative activity. Conventional wisdom and the theoretical predictions of models of endogenous innovation suggest that this increased research effort should lead to more rapid growth. As noted by Charles Jones, this prediction is at odds with the postwar experience of the OECD, where the growth of the market has indeed led to an increased R & D effort that, however, has been translated into stagnat or declining growth rates. Drawing on the remarkable insights of the museum curator Seabury C. Gilfillan, this paper modifies models of endogenous innovation to allow for the possibility that a rise in the profitability of innovative activity could lead to an increased variety of differentiated solutions to similar problems. An increased variety of technologies (e.g., an increase in the number and types of contraceptives) will increase the level of utility of the average consumer. If, however, continued improvement of this increased variety of technologies requires increased research input, a rise in the scale of the market could raise the equilibrium quantity of R & D without increasing the economy's growth rate

[We analyze an overlapping generations model with fixed costs of stock market participation. Participation in the stock market is determined endogenously and covaries positively with preceding innovations in dividends. The equilibrium share price is positively related to market participation of the same period and to information about future dividends. There is "rational trend chasing" in the sense that, although all agents are rational, market participation rises after an increase of the share price and falls after a decrease. Finally, we show that the endogenous fluctuations of market participation lead to increased volatility of the share price