The book begins with a quote from J.H. Dales’ Pollution, Property, and Prices, "If it is feasible to establish a market to implement a policy, no policy-maker can afford to do without one." This book provides important evidence in support of Dales’ statement. The book is a thorough examination of the first several years of the U.S. Acid Rain Program. This innovative program uses a cap-and-trade approach, rather than the traditional command-and-control approach, to reduce sulfur dioxide (SO2) emissions. The book offers substantial evidence of the program’s success. The analysis is of both practical and scientific importance. From a practical viewpoint, the acid rain program is an ambitious effort to reduce a major pollutant. It is important for us to understand whether the program is successful and how it might be improved. From a scientific viewpoint, the authors’ analysis provides a framework and methodology for evaluating similar programs. There is much we can learn about effective regulation from the analysis

This paper examines the roles played by innovations identified from a simple four-variable VAR characterized by cointegration. Using knowledge of cointegration rank and “textbook” relations that link macroeconomic aggregates, we identify distinct “real” and “nominal” innovations that dictate the long-run behavior of the model. We also examine the explanatory power of transitory innovations that are orthogonal to these permanent shocks. One of the permanent shocks displays all the characteristics of a technology or “supply” innovation, while one of the transitory innovations—identified by imposing short-run price rigid-ity—is interpretable as a “demand” side impulse. The permanent nominal shock bears the imprint of an innovation in aggregate inflation expectations. Historical decomposition and comparison with variables that are external to the model reveals the relative importance of the shocks at various episodes

There has been no systematic study of the characteristics of the universities and academic researchers that seem to have contributed most to industrial innovation. Nor do we know how such academic research has been funded. This paper, based on data obtained from sixty-six firms in seven major manufacturing industries and from over two hundred academic researchers, sheds new light on the sources, characteristics, and financing of academic research underlying industrial innovation. The findings should be of interest to economists concerned with technological change and to policymakers attempting to increase the economic payoff from the nation's academic research

Using panel data on U.S. public firms, we document a positive effect of board independence on corporate innovation. This effect is concentrated in firms that are larger in size, in the non-technical industries, facing less product market competition, and using more debt, where managers are more likely to be excessively risk averse. We establish causality of board independence on innovation using a difference-in-difference approach that exploits an exogenous shock to board composition, namely, the mandate of a majority of outside directors on company boards by NYSE and NASDAQ in response to the passage of Sarbanes-Oxley Act in 2002. We further examine incentive compensation as a possible mechanism. We show that firms with more independent boards use more equity-based compensation, especially stock options, to promote managerial risk-taking

We analyze the effect of a firm's innovation activities on its likelihood to be acquired and the takeover premium using a large sample of M&A transactions. We show that firms with larger innovation outputs and R&D investments are more likely to be acquired, receive unsolicited bids, and receive multiple bids. The takeover premium increases with the target firm's innovation output, and this positive relation is stronger when there are more competing bidders, when acquiring firms’ product markets are competitive, and when technological proximity is lower in the acquiring firms’ industry. Both the acquirer's cumulative abnormal return around the announcement date and post-acquisition operating performance are positively related to the target firm's innovation output and R&D spending

We study how capital account liberalization affects technological innovation. We provide robust evidence that industries more dependent on external finance have disproportionately higher innovation performance in economies with a more liberalized capital account. Among the components of capital account liberalization, although both equity market liberalization and outward FDI by domestic firms have sizable effects on innovation, they affect it differently. While equity market liberalization helps alleviate financial constraints by facilitating access to external finance, outward FDI by domestic firms promotes innovative activities by increasing internal finance from foreign operations. Further analysis indicates that the innovation-enhancing effects of capital account liberalization are limited mainly to countries with relatively well-developed financial systems and strong institutional quality, even in periods of financial crisis

Physical telecom networks are costly and few, traditionally to the point of monopoly. Innovation thrives with many independent minds. So one might hope independent innovators, not only its proprietor M, can offer innovative services on a network, as has been true on the Internet. This issue is central in telecom policy; it also arises elsewhere, including complaints about Microsoft. I try to expound the following key points. Often an unregulated M has ex ante incentives to organize service innovation efficiently. But this incentive breaks down ex post as M can extract an independent J’s quasi-rents (Farrell and Michael Katz 2000). Even ex ante, the one monopoly rent theorem (Ward Bowman 1957) fails when M’s bottleneck access business is more regulated than its competitive services (e.g., Jean-Jacques Laffont and Jean Tirole 2000). This tempts M to sabotage J’s innovations. Quarantining M from the service sector solves these problems, but excludes the firm with (often) the best opportunities and the strongest incentives to innovate. Parity pricing or ECPR (Robert Willig 1979) purports to get the best of both worlds (BoBW). But it seems so hard to implement in innovation markets that one might construe ECPR analysis as reductio ad absurdum for BoBW

This paper develops a model of repeated innovation with knowledge spillovers. The model's novel feature is that firms compete on two dimensions: (1) product quality, where one firm's innovation ultimately spills over to other firms; and (2) distribution costs, where there are no spillovers across firms and where learning-by-doing on the part of incumbent firms gives them a competitive advantage over would-be entrants. Such firm-specific learning-by-doing has two important consequences: (1) it can in some circumstances dramatically reduce the long-run average level of innovation; (2) it leads to endogeneous bunching, or waves, in innovative activity

How do innovation and education policy affect individual career choices and aggregate productivity? This paper analyses the effect of R&D subsidies and higher education policy on productivity growth through the supply of innovative talent. We put scarce talent, higher education attainment, and career choice at the centre of a new endogenous growth framework with individual-level heterogeneity in talent, financial resources, and preferences. We link the model to micro-level data from Denmark on the backgrounds of who obtains a PhD and becomes an inventor and the outcomes of a set of policy interventions. We find that R&D subsidies can be strengthened when combined with higher education subsidies, which enable talented but poor youth to pursue a career in research. Education and innovation policies not only alleviate different frictions, but also impact innovation at different time horizons. Education policy is more effective in societies with higher income inequality

Investment banks imitate other bank's innovative corporate securities and compete with the innovator to underwrite new issues. This article uses data of all the corporate offerings of equity-linked and derivative securities in the Securities Data Company (SDC) to estimate the issuer's demand of underwriting services provided by investment banks across different varieties of securities. It finds that the demand for the innovator's variety is larger than the imitators'. This demand advantage decreases with time and faster for securities that appear later in a sequence of innovations. Imitation becomes less attractive later in the sequence as information from earlier deals spills-over to all banks