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 considers a dynamic model of innovations in which firms can endogenously bias the direction of technological change. Both in a North–North and North–South context, we show that, when globalization triggers an increased threat of technological leapfrogging or imitation, firms tend to respond to that threat by biasing the direction of their innovations towards skilled-labor-intensive technologies. We show that this process of defensive skill-biased innovations generates an increase in wage inequalities in both regions. We then discuss suggestive empirical evidence of the existence of defensive skill-biased technical change

Procurement of an innovation often requires substantial effort by potential suppliers. Motivating effort may be difficult if the level of effort and quality of the resulting innovation are unverifiable, if innovators cannot benefit directly by marketing their innovations, and if the buyer cannot extract up-front payments from suppliers. We study the use of contests to procure an innovation in such an environment. An auction in which two suppliers are invited to innovate and then bid their prizes is optimal in a large class of contests. If contestants are asymmetric, it is optimal to handicap the most efficient one

Segerstrom (1998) demonstrates that the social optimum requires “radical” technological breakthroughs to be treated less favorably than “incremental” innovations in a growing economy. The aim of this note is to assess the robustness of this welfare result on the basis of two levels of generalization: (i) the elasticity of substitution between any two goods is allowed to be larger than one, and (ii) inter-industry spillovers are introduced. We show that Segerstrom’s results can be reversed. It is also shown that in contrast to Segerstrom, R&D subsidies can be globally optimal, irrespective of the size of innovation, when inter-industry spillovers are large

Nonmarket goods such as unpaid household labor, leisure, health and longevity, and the environment are important components of the standard of living. They represent a large fraction of all activities. Prime-aged men and women spend 17 percent of their day in leisure activities, and 5 and 13 percent of their time, respectively, in unpaid housework compared to 23 and 13 percent of their time, respectively, in paid work. The quantity of nonmarket goods is rising over time. In the United States, life expectancy at birth is now 77 years, having risen by 29 years since 1900. In Los Angeles County between 1980 and 1998, average annual daily exceedences of the national smog standard declined by 60 days from 71 to 11. Falling big-city murder rates merit national news headlines. Studies of living standards have focused on the tremendous change in the quantity of nonmarket goods but have assumed that the value of nonmarket goods, except for unpaid labor, has remained constant. This assumption underlies most health studies (e.g., David Cutler and Elizabeth Richardson, 1997; Kevin M. Murphy and Robert H. Topel, 2003; William T. Nordhaus, 2003). Nordhaus (2003) valued declines in mortality since 1900 using a constant value of life. Even the Boskin CPI Commission (Michael J. Boskin et al., 1998) discussed trends in the quantity of nonmarket goods (i.e., pollution and crime progress) without mentioning incorporating such goods’ implicit prices into a broader CPI measure. There is no reason to think that implicit prices or the willingness to pay for nonmarket goods has remained constant. Rising real and shadow wages have made both leisure and unpaid household labor more expensive. Rising incomes have also made such normal goods as safety, health, a temperate climate, and the environment more valuable. We document the price dynamics of nonmarket goods by estimating repeat cross-sectional hedonic regressions. We focus on two important and measurable nonmarket goods: job fatality risk and climate. In both cases we find that both price and quantity have been rising. This evidence is consistent with rising valuation. We use our estimates of job-risk compensating differentials to construct new evidence on long-run trends in value of life. Accounting for price changes affects how we view the retrospective and prospective benefits of medical innovations. A rising value of life implies that marginal improvements in safety and in longevity are becoming more valuable. We report evidence that the price of living in a temperate winter and summer climate has significantly increased over time

Employee stock options (ESO’s) are a ubiquitous form of compensation in corporate America. By the late 1990’s, ESO’s outstanding at large corporations averaged 7 percent of total outstanding shares, with top executives holding approximately one-third of total ESO’s (John Core and Guay, 2001). Empirical evidence suggests that firms use ESO’s to align employees’ and shareholders’ interests, attract and retain employees, and compensate employees for their labor while simultaneously raising capital from employees (Core and Guay, 1999, 2001; Kevin J. Murphy, 1999). There is currently an intense debate nationally and internationally among standard-setters, politicians, investors, corporate executives, and academics about whether to require corporations to deduct the estimated value of ESO grants as a business expense in reported income. Existing accounting standards require firms to expense most forms of pay, such as salaries, cash bonuses, and the value of stock grants, but allow firms to choose whether to expense the value of ESO grants. Until very recently, nearly all firms chose not to expense ESO’s. However, firms that do not expense ESO’s must publicly disclose in the financial statement footnotes what reported income would have been if the ESO’s were expensed. In a recent sample of large growth firms, Christine Botosan and Marlene Plumlee (2001) find that mandatory expensing of ESO’s would have resulted in a 14-percent median reduction in firms’ earnings per share. Firms are also required to disclose details of top-executive ESO compensation in the annual proxy statement. Underlying the ESO debate is the concern that the choice among alternative financialaccounting treatments have real economic consequences. A large literature beginning with Ross Watts and Jerold Zimmerman (1978) provides evidence that accounting choice can impose economic costs on firms when contracts (e.g., debt and executive compensation contracts) or influential external parties (e.g., tax authorities) rely on reported accounting numbers (see Thomas Fields et al. [2001] for a survey of this literature). Accounting choice can also have economic consequences if investors fixate on particular numbers, such as reported earnings, resulting in security mispricing and misallocation of capital. Proponents of mandatory expensing argue that ESO’s reflect a cost of acquiring employee labor, and that expensing ESO’s conveys this information to outsiders consistently with other labor costs. Some argue that the absence of ESO expense results in stock mispricings, because investors fixate on reported earnings and fail to understand or utilize supplemental footnote disclosures about the true economic cost of ESO grants. Others argue that, when investors and boards of directors fixate on accounting earnings, the absence of ESO expense exacerbates ineffective corporate governance and allows management to use ESO’s to extract excessive compensation. Proponents of this view argue that expensing ESO’s will reign in management compensation by putting it under a brighter light. Opponents of expensing ESO’s argue that deducting the cost of ESO’s from earnings conveys an impression of weaker financial results to investors and, under the assumption that investors fixate on reported earnings, could raise the firms’ cost of financing and stifle corporate investment and innovation. There is also a concern that external parties, such as taxing authorities, might use changes in financial-accounting treatment as a cue to alter regulatory and tax policy