Knowledge that Transforms

Major technological, regulatory, and institutional changes have made finance more widely available in recent years. The ability of institutions to price a variety of exotic instruments, and to assess and spread risks, has increased. More data on potential borrowers is now available, and it is also more timely. Improvements in accounting disclosure have resulted in greater borrower transparency. Deregulation has resulted in greater competition and better prices in markets. Finally, regulatory barriers protecting the turf of different kinds of institutions have come down, resulting in the emergence of new institutional forms. These changes amount to a bona fide financial revolution. In this article, we focus on the impact the revolution has had on the way firms are (or should be) organized and managed, and on the policy consequences. To do this, we first need to understand what firms are and what drives their organizational structure. A caveat is in order at the outset. Finance is not the only force transforming the nature of firms in the last two decades; deregulation and technological change have also played big roles. These have been explored elsewhere (see e.g., Rajan and Zingales, 2000); hence, our focus. I. Critical Resource Theory

In his path-breaking 1937 article, Ronald Coase first identified the determinants of a firm's scope as an important research question. Although Coase's question initially attracted little attention, it has emerged over the last 25 years as a central issue in industrial organization. Much of the literature on firm scope since Coase uses the transaction-cost economics approach (henceforth, the TCE) pioneered by Oliver Williamson (1975, 1979, 1985) and Benjamin Klein et al. (1978). The TCE starts with the assumption that market transactions are plagued by incomplete contracts and the development of lock-in among trading partners. Lock-in leads the value of the relationship to exceed the value of the trading partners' outside alternatives creating what Klein et al. called quasi-rents. Contractual incompleteness gives contracting parties the ability to engage in opportunistic behavior to increase their share of these quasi-rents, leading to efficiency losses in market transactions. Internal procurement, on the other hand, involves its own inefficiencies, most notably the costs of bureaucracy and lowpowered incentives. According to the TCE, the optimal organizational form is found by comparing the efficiencies of these distinct transactional modes. Its primary prediction is that, as market transactions become characterized by increasing levels of quasi-rents and incompleteness in contracts, the likelihood of integration should increase. More recently, a great deal of attention has focused on an alternative theory of firm scope, the property-rights theory (henceforth, the PRT), pioneered by Sanford Grossman and Oliver Hart (1986) and Hart and John Moore (1990) (see also Hart, 1995). Like the TCE, the PRT starts with the assumption that contracts are incomplete and that lock-in often develops among trading partners. It then focuses on how ownership of physical assets, which confers residual rights of control over the assets, alters the efficiency of trading relations. In the process of doing so, the PRT produces a theory that differs from the TCE in three ways. The first is methodological rather than substantive: the PRT is substantially more formal than the (largely verbal) TCE. Second, the PRT focuses on distortions in ex ante investments, in contrast to the ex post haggling costs that are a major focus of the TCE.1 Third, the PRT assumes that efficiency losses are of the same nature in all ownership structures. That is, ownership of physical assets affects the parties' abilities to engage in opportunistic behavior not only in market transactions, but also within the firm. A very large empirical literature exists lending support to the TCE (for one survey, see Howard A. Shelanski and Peter G. Klein [1995]). In a typical study, some measure of lock-in, such as the specificity of the product procured or investments made, is related to the choice of whether to integrate. The strong association that this literature has found between specificity and integration has made the TCE

Tallest in the World: Native Americans of the Great Plains in the Nineteenth Century by Richard H. Steckel and Joseph M. Prince. Published in volume 91, issue 1, pages 287-294 of American Economic Review, March 2001

In this paper we analyze the impact of the Internet on the performance of the economy and the standard of living of average Americans. Our analyses illustrate that even though the stock market’s speculative bubble has burst, the Internet will continue to have a significant impact on old economy industries and as a result generate real benefits for the overall economy.

This paper develops a two-country model to study two questions. How do the degrees of centralization of redistribution and of factor mobility affect the productive efficiency of the economies? What degrees of centralization of redistribution and of factor mobility are likely to be chosen by majority rule? The model shows that a system of centralized redistribution can lead to less efficient outcomes if labor or capital are not mobile; and an inefficient outcome, with incomplete or no factor mobility, receives a majority of votes in both countries, whenever the structure of labor markets is very different in the two countries. (JEL D72, E62, H50, H77)

Recent research on child support issues has been concerned with normative problems involvingthe distribution of welfare between divorced parents and their children as well as with the assess-ment of the behavioral responses of parents to child support orders and custody arrangements( see, e.g., Del Boca and Flinn (1995), GarÞnkel and Klawitter (1990), Bartfeldt and GarÞnkel(1996), Del Boca (1996), Del Boca and Ribero (1998), and Flinn (2000)). While there is bynow an extensive literature analyzing the effects of child support policies on monetary transfersof noncustodial parents and the extent of compliance with child support orders, little researchhas been done on the relationship between monetary transfers between parents and the divisionof the child™s time. While income transfers to the custodial parent are no doubt importantfor the child™s consumption and general well-being, there exists considerable empirical evidencesuggesting that the division of the child™s time between the parents has important e ffects on thechild™s welfare ( Beller and Graham (1993)).There have been few analyses of this relationship.Weiss and Willis (1985) provide one theoretical motivation for the positive relationship betweenthe noncustodial parent™s contact time with the child and their level of transfers. They claimthat increased contact time allows better monitoring of the custodial parent™s expenditures onthe child, which induces higher levels of transfers to the custodial parent.We have developed a model (Del Boca and Ribero ( 1999)) in which visitations and childsupport are the outcomes of a negotiation process whereby the father exchanges income forvisitation time. Institutional agents, such as judges, state legislatures, etc, can impact thewelfareofthemembersofthenonintactfamilybyalteringtheendowmentsofeachofthe1

Iceland's Natural Experiment in Supply-Side Economics by Marco Bianchi, Bjorn R. Gudmundsson and Gylfi Zoega. Published in volume 91, issue 5, pages 1564-1579 of American Economic Review, December 2001

We use data on imports of computer equipment for a large sample of countries between 1970-90 to investigate the determinants of computer-technology adoption. We find strong evidence that computer adoption is associated with higher levels of human capital and with manufacturing trade openness vis-à-vis the OECD. We also find evidence that computer adoption is enhanced by high investment rates, good property rights protection, and a small share of agriculture in GDP. Finally, there is some evidence that adoption is reduced by a large share of government in GDP, and increased by a large share of manufacturing. After controlling for the above-mentioned variables, we do not find an independent role for the English- (or European-) language skills of the population.