Walter Nonneman, Patrick Vanhoudt; A Further Augmentation of the Solow Model and the Empirics of Economic Growth for OECD Countries*, The Quarterly Journal of E

This paper provides a new perspective on the validity of the so-called 'leverage theory'. In a model of preemptive innovation in 'systems' markets, 1 examine the effect of bundling on R&D incentives. 1 find that bundling provides a channel through which monopoly 'slack' in one component market can be shifted to another, with the effect of mitigating rent dissipation in the systems market. Bundling can be profitable if this beneficial effect of reduced rent dissipation outweighs the negative effect of intensified price competition. After demonstrating the private optimality of bundling, its welfare implications are considered. There is a discrepancy between the market outcome and the socially optimal outcome which can be explained in terms of externalities conferred on consumers' surplus and the rival firm's profits due to bundling. Finally, the results can be reinterpreted to analyze the relationship between compatibility decisions and R&D incentives in mix-and-match models.

We show that a manufacturer facing uncertain demand and selling through a competitive retail market may wish to support adequate retail inventories by preventing the emergence of discount retailers. In our model, discounters offer low prices made possible by low probability of being saddled with unsold inventories in the event of slack demand. Full-price retailers are compensated for a higher probability of unsold inventories by a higher retail price when they sell. We show that preventing discounting increases the manufacturer's wholesale demand and profits, and we delineate demand conditions under which equilibrium inventory holding and consumer welfare increase.

This paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the United States. We find that the rates of real, per capita growth in income and output increase significantly following intrastate branch reform. We also argue that the observed changes in growth are the result of changes in the banking system. Improvements in the quality of bank lending, not increased volume of bank lending, appear to be responsible for faster growth.

This paper explains why developed countries impose more trade barriers on middle-income countries than on either poor or other developed countries. We use a median voter model of the choice between trade and autarky embedded within an intraindustry trade model similar to Krugman. Our main result is the derivation of conditions under which a rich country rejects trade with middle-income countries, but accepts trade with either similar or poor countries. We also show that if increased inequality lowers median wealth in the developed country, the range of countries for which free trade is rejected is enlarged.

We develop a framework for quantifying the amount of risk sharing among states in the United States, and construct data that allow us to decompose the cross-sectional variance in gross state product into several components which we refer to as levels of smoothing. We find that 39 percent of shocks to gross state product are smoothed by capital markets, 13 percent are smoothed by the federal government, and 23 percent are smoothed by credit markets. The remaining 25 percent are not smoothed. We also decompose the federal government smoothing into subcategories: taxes, transfers, and grants to states.

We report experiments on how players select among multiple Pareto-ranked equilibria in a coordination game. Subjects initially choose inefficient equilibria. Charging a fee to play (which makes initial equilibria money-losing) creates coordination on better equilibria. When fees are optional, improved coordination is consistent with forward induction. But coordination improves even when subjects must pay the fee (forward induction does not apply). Subjects appear to use a “loss-avoidance” selection principle: they expect others to avoid strategies that always result in losses. Loss-avoidance implies that “mental accounting” of outcomes can affect choices in games.

The paper suggests a new test for rent-sharing in the U. S. labor market. Using an unbalanced panel from the manufacturing sector, it shows that a rise in a sector's profitability leads after some years to an increase in the long-run level of wages in that sector. The paper controls for workers' characteristics, for industry fixed effects, and for unionism. Lester's range of wages is estimated, for rentsharing reasons alone, at approximately 24 percent of the mean wage.