Knowledge that Transforms

How far should an industry be allowed to consolidate when competition and innovation are endogenous? We develop a stochastically alternating-move game of dynamic oligopoly and estimate it using data from the hard disk drive industry, in which a dozen global players consolidated into only three in the last 20 years. We find plateau-shaped equilibrium relationships between competition and innovation, with heterogeneity across time and productivity. Our counterfactual simulations suggest the current rule-of-thumb policy, which stops mergers when three or fewer firms exist, strikes approximately the right balance between pro-competitive effects and value-destruction side effects in this dynamic welfare trade-off.

This article examines the dynamic effects of a teachers’ pay for performance experiment on long-term outcomes at adulthood. The program led to a gradual increase in university education of the treated high school students, reaching an increase of 0.25 years of schooling by age 28–30. The effects on employment and earnings were initially negative, coinciding with a higher rate of enrolment in university, but became positive and significant with time. These gains are largely mediated by the positive effect of the program on several high school outcomes, including quantitative and qualitative gains in the high-stakes matriculation exams.

We examine empirically the generalizability of internally valid micro-estimates of causal effects in a fixed population over time when that population is subject to aggregate shocks. Using panel data, we show that the returns to investments in agriculture in India and Ghana, small and medium non-farm enterprises in Sri Lanka, and schooling in Indonesia fluctuate significantly across time periods. We show how the returns to these investments interact with specific, measurable, and economically relevant aggregate shocks, focusing on rainfall and price fluctuations. We also obtain lower-bound estimates of confidence intervals of the returns based on estimates of the parameters of the distributions of rainfall shocks in our two agricultural samples. We find that even these lower-bound confidence intervals are substantially wider than those based solely on sampling error that are commonly provided in studies, most of which are based on single-year samples. We also find that cross-sectional variation in rainfall cannot be confidently used to replicate within-population rainfall variability. Based on our findings, we discuss methods for incorporating information on external shocks into evaluations of the returns to policy.

In this article, I directly test the hypothesis that interactions between inventors of different firms drive knowledge spillovers. I construct a network of publicly traded companies in which each link is a function of the relative proportion of two firms’ inventors who have former patent collaborators in both organizations. I use this measure to weigh the impact of R&D performed by each firm on the productivity and innovation outcomes of its network linkages. An empirical concern is that the resulting estimates may reflect unobserved, simultaneous determinants of firm performance, network connections, and external R&D. I address this problem with an innovative IV strategy, motivated by a game-theoretic model of firm interaction. I instrument the R&D of one firm’s connections with that of other firms that are sufficiently distant in network space. With the resulting spillover estimates, I calculate that among firms connected to the network the marginal social return of R&D amounts to approximately 112% of the marginal private return.

We show that a change in organizational structure from partnerships to public companies—which weakens contractual commitment—can lead to higher investment in high return-and-risk activities, higher productivity (value added per employee) and greater income dispersion (inequality). These predictions are consistent with the observed evolution of the financial sector where the switch from partnerships to public companies has been especially important in the decades that preceded the 21st Century financial crisis.

Colonial powers typically organized economic activity in the colonies to maximize their economic returns. While the literature has emphasized long-run negative economic impacts via institutional quality, the changes in economic organization implemented to spur production historically could also directly influence economic organization in the long-run, exerting countervailing effects. We examine these in the context of the Dutch Cultivation System, the integrated industrial and agricultural system for producing sugar that formed the core of the Dutch colonial enterprise in 19th century Java. We show that areas close to where the Dutch established sugar factories in the mid-19th century are today more industrialized, have better infrastructure, are more educated, and are richer than nearby counterfactual locations that would have been similarly suitable for colonial sugar factories. We also show, using a spatial regression discontinuity design on the catchment areas around each factory, that villages forced to grow sugar cane have more village-owned land and also have more schools and substantially higher education levels, both historically and today. The results suggest that the economic structures implemented by colonizers to facilitate production can continue to promote economic activity in the long run, and we discuss the contexts where such effects are most likely to be important.