Knowledge that Transforms

History suggests the following stylized facts about default on sovereign debt:(1) Defaults are associated with identifiably bad states of the world. (2) Defaults are usually partial, rather than complete.(3) Sovereign states usually are able to borrow again soon after a default. Motivated by these facts, this paper analyses a reputational equilibrium in a model that interprets sovereign debts as contingent claims that both finance investments and facilitate risk shifting. Loans are a useful device to facilitate risk shifting because they permit the prepayment of indemnities. Nevertheless, because the power to abrogate commitments without having to answer to a higher enforcement authority is an essential aspect of sovereignty, a decision by a sovereign to validate lender expectations about debt servicing depends on the sovereign's concern for its trust worthy reputation. A trustworthy reputationis valuable because it provides continued access to loans. A key aspect of the analysis is that lenders differentiate excusable default, which is associated with implicitly understood contingencies, from unjustifiable repudiation. In the reputational equilibrium, the short-run benefits from repudiation are smaller than the long-run costs from loss of a trustworthy reputation. Thus, although sovereigns sometimes excusably default, they never repudiate their debts. The reputational equilibrium can involve efficient risk shifting and efficient investment or it can involve a binding lending ceiling that limits risk shifting and can also restrict investment. The factors that tend to produce a binding lending ceiling include a high time discount rate for the sovereign, low-risk aversion forthe sovereign, and a low net return from the sovereign's investments.

A fragile inference is not worth taking seriously. All scientific disciplines routinely subject their inferences to studies of fragility. Why should economics be different? hasn't been different up to now. Nor do I think it ever will be, notwithstanding the comments of Michael McAleer, Adrian Pagan, and Paul Volker (1985). Decentralized studies of fragility are common whenever an inference matters enough to attract careful scrutiny. When Isaac Erlich (1975) claims to have demonstrated that capital punishment deters murders, he elicits a great outpouring of papers that show how the result depends on which variables are included (B. Forst 1977), which observations are included (A. Blumstein et al., 1978), how simultaneity problems are dealt with (P. Passell, 1975), etcetera, etcetera. These disorganized studies of fragility are inefficient, haphazard, and confusing. What we need instead are organized sensitivity analyses. We must insist that all empirical studies offer convincing evidence of inferential sturdiness. We need to be shown that minor changes in the list of variables do not alter fundamentally the conclusions, nor does a slight reweighting of observations, nor correction for dependence among observations, etcetera, etcetera. I have proposed a form of organized sensitivity that I call global sensitivity analysis in which a neighborhood of alternative assumptions is selected and the corresponding interval of inferences is identified. Conclusions are judged to be sturdy only if the neighborhood of assumptions is wide enough to be credible and the corresponding interval of inferences is narrow enough to be useful. But when an incredibly narrow set of assumptions is required to produce a usefully narrow set of conclusions, inferences from the given data set are reported to be too fragile to be believed. In dramatic conflict with real data analyses, theoretical econometricians behave as if a given data set admitted a unique inference. This priesthood takes as their self-appointed task the uncovering of the elaborate method by which the unique inference can be squeezed from a data set. Indeed, this is the reaction of McAleer et al., who offer a method of squeezing Thomas Cooley and Stephen Leroy's (1981) data set. They propose to deal with ambiguity by charting one ad hoc route through the thicket of possible models. Complicated ad hoc searches like the one they suggest have no support in statistical decision theory, and virtually none in classical sampling theory. What is to be made of a procedure that sets scores of parameters to zero if they are not statistically significant at arbitrarily chosen levels of significance? And what inferences are allowable after a model passes a battery of specification error tests that are sometimes more numerous than even the set of observations? This recommendation of McAleer et al. merits the retort: There are two things you are better off not seeing in the making: sausages and econometric estimates, to which they might reply: It must be right, I've been doing it since my youth.

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.

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helpful comments, and to Michael Cox for generously providing us with his data. The research reported here is part of the NBER's research program in Economic Fluctuations and project in Government Budget. Any opinions expressed are those of the authors and not

The paper is organized as follows: Section I examines the type of building, characterized by its size, that will be built at a given date if the land is to be developed at that time. Section II presents a simple two-date, two states of nature, model for determining the value of the vacant land for the case where the future price of building units, and hence the size of the building that is to be constructed, is uncertain. A simple numerical example that illustrates this valuation technique is presented in Section III . Section IV presents a comparative static analysis of this valuation model which includes, among other things, an analysis of the effect of uncertainty on vacant land value. Section V examines a model where the current price and rental rate on building units as well as land values are endogenous and Section VI provides a numerical example which illustrates how the valuation technique can be applied to value land with many possible building dates and many possible states of nature corresponding to each date.

A new data set for approximately 1, 000 largest manufacturing firms inthe United States during 1957-77 is analyzed using a standard production function framework augmented by the addition of R&D "capital" and "mix" variables. The results indicate that R&D continued to contribute to productivity growth with no significant decline in its effectiveness in the 1970s as compared to the 1960s; that the contribution of basic research was significantly higher than its nominal ratio would imply; and that federally financed R&D expenditures had a positive but smaller effect on the productivity growth of these firms than the comparable contribution of privately financed R&D expenditures.