Knowledge that Transforms

The recent explosion of patenting and patent disputes has sparked a growing literature on the economics of patent litigation. Generally, models in this literature take the existence of a dispute as given. This assumption is troubling because it hampers the interpretation of empirical studies of patent litigation and the assessment of many patent policy reforms. Disputes would not arise if all technology adopters obtained ex ante licenses from patent owners. This suggests that two stories could explain the origin of patent disputes. In one, the technology adopter observes a patented technology, but chooses to imitate, “inventing around” and/or hiding the infringement. In the other, the adopter develops his own technology and is unaware of another firm’s putative patent rights. This kind of innocent infringement occurs because patent rights often have uncertain boundaries or questionable validity. In addition, the sheer number of patents facing a typical innovator makes careful assessment quite burdensome. Furthermore, patent claims are often hidden (sometimes strategically) until after firms have made technology investments. These two accounts suggest that a model of disputes should consider the decisions of patent owners to invent, to patent, and to monitor use of the patented technology by others; and the decisions of potential infringers to monitor extant patents, and develop and adopt new technology. Claude Crampes and Corinne Langinier (2002) endogenize disputes by focusing on a patent owner’s monitoring activity and imitative behavior by potential infringers. Our model includes this behavior, but it also includes defendants who “invent around” a patent, and defendants who are unaware of the patented technology. We find that this richer model generates testable implications that better match empirical evidence on patent litigation.

This paper is part of a research program analyzing how competition affects aggregate innovative activity through its effects on firms’ organization. In previous work (Aghion et al., 2005a), we found an inverted-U shaped relationship between competition and innovation. Our explanation emphasized the “composition effect” of competition on the steady-state distribution of technological gaps across industries. Our focus here is on firms’ decisions whether or not to integrate vertically with their suppliers. We provide evidence of a U-shaped relationship between competition and vertical integration. Our explanation is based on the following idea: a moderate increase in product market competition will reduce a producer’s incentive to integrate by improving the outside options of her nonintegrated suppliers and hence raising their incentive to innovate. Too much competition will raise the producer’s incentive to integrate, however, by allowing nonintegrated suppliers to capture most of the innovation surplus. Finding a U-shaped relationship between competition and vertical integration sheds light on the debate over the “Transaction Cost Economics” (TCE) approach to vertical integration pioneered by Oliver Williamson (1975, 1985) versus the “Property Right Theory” (PRT) approach developed by Sanford Grossman and Oliver Hart (1986) and by Hart and John Moore (1990). According to the TCE approach, vertical integration is a way for contracting parties involved in a specific relationship to limit ex post bargaining inefficiencies due to holdup and thereby minimize the loss in ex ante investment that would result from it. This approach thus predicts a positive correlation between vertical integration and the degree of relation specificity. According to the PRT approach, the ownership structure will affect not so much the ex post bargaining efficiency as the relative bargaining powers of the (two) contracting parties, and therefore their relative ex ante investment incentives. Thus, while vertical integration should enhance both parties’ investments positively in the TCE approach by reducing the extent of ex post inefficiency, in the PRT approach ownership by one party, say the buyer, will enhance the buyer’s ex ante incentives at the expense of the seller’s, as it enhances the buyer’s bargaining power ex post at the expense of the seller’s. Thus, the TCE approach predicts that increased competition on the producer’s (or supplier’s) market, which reduces the overall degree of asset specificity, should therefore reduce the need for vertical integration in order to preserve ex ante investment incentives by either party. On the other hand, as we show below, the PRT approach allows the U-shaped relationship between vertical integration and competition that we find empirically. † Discussants: Sam Kortum, University of Minnesota; Mark Duggan, University of Maryland; Joel Waldfogel, University of Pennsylvania; Shane Greenstein, Northwestern University.

The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized for failing to account for the dependence of inflation on its own lags. In response, many studies employ a “hybrid” specification in which inflation depends on its lagged and expected future values, together with a driving variable such as the output gap. We consider some simple tests of the hybrid model that are derived from its closed form. We find that the hybrid model describes inflation dynamics poorly, and find little empirical evidence for the type of rational, forward-looking behavior that the model implies.

Labor supply theory predicts systematic heterogeneity in the impact of recent welfare reforms on earnings, transfers, and income. Yet most welfare reform research focuses on mean impacts. We investigate the importance of heterogeneity using random-assignment data from Connecticut's Jobs First waiver, which features key elements of post-1996 welfare programs. Estimated quantile treatment effects exhibit the substantial heterogeneity predicted by labor supply theory. Thus mean impacts miss a great deal. Looking separately at samples of dropouts and other women does not improve the performance of mean impacts. We conclude that welfare reform's effects are likely both more varied and more extensive than has been recognized.

We use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment spending. We find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow, even for firms typically thought to be liquidity constrained. These results have two key implications. First, fundamentals may be more important for investment spending than would be suggested by the results to date from investment-q models. Second, the positive cash-flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints.

Fifteen years after German reunification, the facts about slow regional convergence have born out the prediction of Barro (1991), except that migration out of East Germany has not slowed down. I document that in particular the 18-29 year old are leaving East Germany, and that the emigration has accelerated in recent years. To understand these patterns, I provide an extension of the standard labor search model by allowing for migration and network externalities. In that theory, two equilibria can result: one with a high networking rate, high average labor productivity, low unemployment and no emigration (“West Germany”) and one with a low networking rate, low average labor productivity, high unemployment and a constant rate of emigration (“East Germany”). The model does not imply any obviously sound policies to move from the weakly networked equilibrium to the highly networked equilibrium.(This abstract was borrowed from another version of this item.)

Little is known about the microeconomic impacts of workers ’ remittances despite their magnitude in countries with considerable out-migration. Reports that families receiving international remittances severely curtail their work efforts are fairly common in the popular press (e.g. Frank 2001). Yet, we lack rigorous analyses of how male and female labor supplies respond to increases in remittance income to either support or refute these anecdotal observations. According to the neoclassical model of labor-leisure choice (Killingsworth 1983), remittances –a source of non-labor income – may lift budget constraints, raise reservation wages and, through an income effect, reduce the employment likelihood and hours worked by remittance-receiving individuals. However, the receipt of remittances is usually preceded by the out-migration of working-aged household members, which may induce changes in the labor supply of non-migrating household members in order to compensate for forgone income or to defray migration-related expenses. Distinguishing the disruptive effect from the income effect of remittance inflows is problematic as most surveys do not contain detailed information on household out-migration and remittance receipt. However, to the extent that these two effects are expected to have opposite impacts on labor supply, we can assess which effect dominates. The impact of remittances on the decision to work has been previously examined by Rodriguez and

Personal connections can function as privileged channels of information and trust. When the reliability of information is particularly important applying for a job, needing capital for a new enterprise, moving to a new country their role often becomes crucial. Hence the ethnic enclaves, both residential and professional, in New York City; the economic weight of the Overseas Chinese in their countries of residence; the success of Medieval networks of merchants, organized along ethnic or religious lines. Personal networks are often very successful, but they are by their nature discriminatory and thus tend to generate resentment and opposition among those excluded. Economists and sociologists debate whether networks can be replicated artificially. Not surprisingly, economists tend to be more optimistic, believing that appropriate market mechanisms, encouraged and supported by policy where necessary, can substitute for the missing personal channels. Sociologists on the other hand, see the personal, spontaneous link as the essence of the relation, and thus as something that by its nature cannot be replicated at will (e.g. Marta Tienda and Rebeca Raijman (2001), discussing James E. Rauch (2001)). We address this question in a simple model of labor markets where workers differ in their unobservable productivity. We ask how signaling the possibility of engaging

Today’s American mercantile pressure on China to appreciate the renminbi against the dollar is eerily similar to the American pressure on Japan to appreciate the yen that began over 30 years ago. Indeed, the yen went all the way from 360 to the dollar in August 1971, at the end of the Bretton Woods period of fixed exchange rate parities, to touch 80 to the dollar in April 1995. Then the American government relented and announced a strong dollar policy that signaled the end of “Japan bashing”. But the overvalued yen, and the expectation of appreciation, destabilized the Japanese financial system; the bubble economy of the late 1980s was followed by a deflationary slump and a zero-interest liquidity trap in the 1990s [McKinnon and Ohno 1997]. At least some of today’s critics of East Asian countries ’ pegging to the dollar would agree that international saving imbalances rather than misaligned exchange rates are the root cause of the U.S. current-account deficit. One can argue whether it is mainly a saving deficiency in the United States or a saving glut in the rest of the world [Bernanke 2005]. Either way, the central position of the United States under the world dollar standard gives it alone an unlimited international line of credit in its own currency. However, suppose that the U.S. trade deficit is misdiagnosed to result from a misaligned exchange rate, so that a surplus country on the dollar’s periphery is forced to appreciate against the world’s dominant money. It will suffer a slowdown in economic

In this study we extend our previous work to examine the dynamic relationship between violence committed by Palestinian factions and that committed by Israel during the Second Intifada. We find a statistically significant relationship between Israeli fatalities claimed by groups associated with the ruling political party, Fatah, and subsequent Palestinian fatalities. We do not find a similar relationship for Israeli fatalities claimed by Hamas, Palestinian Islamic Jihad, and other Palestinian factions. We conjecture that these differences are due to the different positions of the factions vis-à-vis bargaining over a two-state solution to the conflict as well as the organizational structures of the factions.