Knowledge that Transforms

This paper analyzes the effects of international openness on vertical integration. Vertical integration can confer a negative externality, by thinning the market for inputs and thus worsening opportunism problems; this induces strategic complementarity and multiple equilibria in the integration decision, thus providing a theory of different “industrial systems” or “industrial cultures” in ex ante identical countries. International openness thickens the market, facilitating leaner, less integrated firms, thus providing gains from international openness quite different from those that are familiar from trade theory. This may be taken as one theory of “outsourcing,” “downsizing,” and “Japanization” as consequences of “globalization.”

Variable pay is usually defined as pay that is tied to some measure of worker output. The most typical form of variable pay historically was the piece rate, which was more prevalent during the early part of the 20th century than it is at the beginning of the 21st. There is a resurgence in variable pay, particularly as it relates to executives, whose pay is tied to output through some mechanism like stock options or bonuses that depend on individual or firm performance. Why use variable pay? The typical reaction is that variable pay provides incentives to put forth effort. Although true, discrete-pay schemes also generate incentives. Much of the confusion in the literature results from the use of the terms high-powered and low-powered incentives, which connote difference in ability to elicit worker effort.' It is more informative to make distinctions between discrete and continuous pay and between inputbased and output-based pay.2 Pay structures can be summarized by the following equation:

The countercyclical pattern of inventory-sales ratios is a striking feature of inventory behavior. In a model where inventories are productive for sales, both the markup of price over marginal cost and expected changes in marginal cost are key determinants of that ratio. This paper argues that costly variation in factor utilization gives rise to countercyclical markups in production-to-stock manufacturing industries. The markup turns out to be more important than intertemporal substitution in explaining the behavior of inventory-sales ratios.

The tension between allocative efficiency and information aggregation is explored in the context of an auction: k identical objects of unknown quality are auctioned off to n bidders whose tastes affect their valuation of an object of given quality. Bidders receive a signal about the quality of the objects. The k highest bidders get an object and pay a price equal to the k + 1st highest bid. We find conditions under which, in the limit, objects are allocated efficiently to those with the highest tastes, and price converges in probability to the value of an object to the marginal taste type.

Caballero (1991) shows that a larger uncertainty only increases the investment of a perfectly competitive firm with a constant returns to scale technology. We show, however, that the option value generated by a one-time fixed cost can cause the increasing uncertainty to reduce investment from a positive value to zero. (This abstract was borrowed from another version of this item.)

Microsoft's Internet Explorer (JE) technologies are included in Windows at no separate charge. Versions 1 and 2 of IE functioned as add-on features in Windows 95. They were not tightly integrated into Windows and did not make applications programming interfaces available to other software. Over time, IE became increasingly integrated into Windows, sharing code with other Windows features and supplying processing services to other operatingsystem components and to software applications. In addition to distribution as part of Windows, Microsoft has routinely offered free IE distribution and upgrades through other channels. Microsoft has also compensated internet access providers (IAP's) and internet content providers (ICP' s) for their efforts to promote the use and distribution of IE. Despite IE's no-revenue track record and assurances of free availability in the future, Microsoft spends large sums developing and promoting IE. One interpretation of these (and other) facts holds that Microsoft unlawfully tied the browsing functionality of IE to Windows 95 and 98 for anticompetitive purposes. This view rests on the premise that a non-Microsoft web browser could evolve into a substitute for Windows or promote potential substitutes. Of course, the emergence of a substitute would erode the profitability of Windows. Hence, according to this view, Microsoft sought to preclude or forestall the emergence of alternative software platforms by tying its own web browser to Windows and by entering into promotional agreements that raise costs for rival web browsers. As an alternative to this view, we offer a pro-competitive perspective on Microsoft's behavior with respect to IE. Our perspective resonates with several other aspects of Microsoft's behavior as well. It also carries important implications for the connection between market structure and consumer welfare.

We use 1980 and 1990 Census data for 119 larger Metropolitan Statistical Areas to examine the effect of skill-group specific immigrant inflows on the location decisions of natives in the same skill group, and on the overall distribution of human capital. To control for unobserved skill-group specific demand factors, our models include lagged mobility flows of natives over the 1970-80 period. We also estimate instrumental variables models that use the fraction of Mexican immigrants in 1970 to predict skill-group specific relative immigrant inflows over the 1980s. Despite wide variation across cities in the size and relative skill composition of immigrant population changes we find no evidence of selective out-migration by natives. We conclude that immigrant inflows exert a direct effect on the relative skill composition of cities: cities that have received relatively unskilled immigrant flows have experienced proportional rises in the size of their unskilled populations.

Selective versus Universal Vouchers: Modelling Median Voter Preferences in Education by Zhiqi Chen and Edwin G. West. Published in volume 90, issue 5, pages 1520-1534 of American Economic Review, December 2000

The discussion about new international financial architecture in the last several years is the most extensive debate about international monetary reform since the 1960's. The motivation for the current debate has been the sharp declines in GDP that resulted from the recent financial crises in Mexico, Thailand, Indonesia, and South Korea. The 1990's debate about international monetary reform differs from the earlier debate in two important ways-one is certainly important and the other may be important. In the 1960's there was a clear identification of the problem that had to be resolved; a mechanism was needed that would enable Germany, Japan, and numerous other countries to satisfy their demand for international reserve assets without inducing a persistent U.S. payments deficit. The problem involved the consistency between the demand and supply of reserves at a global level. In contrast, currently there is no agreement on the problem that must be resolved, as is strikingly evident from the diversity of proposals to reform the architecture. One view is that capital flows are too volatile, another is that bank regulation in many countries is inadequate (transparency and accountability are the buzzwords), and a third is that exchange rates have been pegged when they should have been allowed to float. A fourth is that there is need for an international lender of last resort. The debate in the 1960's originated with individuals in the universities; for several years those in the financial establishment were reluctant to accept the definition of the problem. They slighted the connection between the increase in demand for international reserve assets in Germany, Italy, Japan, and a number of other countries and the U.S. payments balance. In contrast, in the 1990's the discussion of reform initially involved individuals in official institutions. The uniqueness of the recent events was the combination of the sharp sudden depreciation of national currencies and the large loan losses incurred by the domestic banks that appear to have been in the range of 15-20 percent of GDP in the affected countries. The extent of currency overshooting was more extensive than in any previous episode. The debate about whether the Asian Financial Crisis is primarily a domestic banking and real-estate crisis or instead primarily a foreignexchange crisis partly stimulated by the rapid move to financial liberalization still has not been resolved. At the onset of the crisis in each of the several countries, there was a severe liquidity squeeze; asset prices declined sharply. Asset prices increased as this squeeze abated, but these prices have renmained much below their levels prior to the crisis; the implication is that these assets were substantially overvalued prior to the crisis. Much of the discussion has involved the fit or consistency among unrest-rained cross-border capital movements, the exchange-rate arrangement (and particularly whether currencies are pegged or free to float), and the central-bank monetary policies. One theme is that currencies cannot be pegged if capital flows are not constrained; the interpretation is that floating exchange rates would be preferable to pegged rates. The dominant view is that the severity of the Asian crisis reflects the fact that the central banks were reluctant to permit their currencies to depreciate when the capital inflow declined. The three papers in this session represent a tripartite approach toward restructuring institutional arrangements: one part is the role of the exchange rates, a second part is the role of international financial institutions, and the third is the role of central banks. These three institutional components can be arranged in a hierarchy, and the key is the role of central banks and their choice of monetary policies, which in turn has implications for the preferred choice of the exchange-rate regime. The central question is * Graduate School of Business, University of Chicago, 1101 E. 58th Street, Chicago, IL 60637.

A half-century ago, Joseph Schumpeter (1950 Chapters 5–8) presented a vision of modern capitalism in which monopolies are common but frequently swept aside by a “perennial gale of creative destruction” (p. 84). This gale is driven not by price competition, but by “competition from the new commodity, the new technology ... competition which strikes not at the margins of the profits of the existing firms but at their foundations and their very lives” (p. 84). I focus here on the personal-computer (PC) software (hereafter simply “software”) industry, which resembles this vision. I discuss some important issues this industry poses for antitrust policy and, in the final section, illustrate with examples from the Microsoft case.