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.

A partnership is a coalition that divides its output equally. We show that when partnerships can form freely, a stable or "core" partition into partnerships always exists and is generically unique. When people differ in ability, the equal-sharing constraint inefficiently limits the size of partnerships. We give conditions under which partnerships containing abler people will be larger, and show that if the population is replicated, partnerships may become more or less homogeneous, depending on an elasticity condition. We also examine when the equal-sharing inefficiency vanishes in the limit.

We show that a new product monopolist may benefit from (delayed) competition if consumers incur setup costs. Setup costs create a dynamic consistency problem: the monopolist cannot guarantee low future prices once customers have incurred those costs. We show that, if customers anticipate this problem, the monopolist's profits can be improved through ex ante commitment to competition in the post-adoption market, if setup costs are large. If setup costs are small, the monopolist can typically achieve the same level of profits without price commitment as with.

X-inefficiency is surely among the most important topics in microeconomics. Yet, economists have found it difficult to study. If a given level of X-inefficiency were inevitable and changeless, it would be of little interest (indeed, would not really deserve to be called X-inefficiency at all). So our attention should focus on actual and potential changes in X-inefficiency: that is, on causes of changes, internal to a firm, that shift the firm's cost function. We explore the use of firms ' “cost-cutting” announcements to study the causes of changes in X-inefficiency. Cost cutting announcements by large corporations are made frequently and are reported in the business press. One might be tempted to interpret these announcements as indicating efforts to reduce X-inefficiency, and indeed we

We study the welfare economics of probabilistic patents that are licensed without a full determination of validity. We examine the social value of instead determining patent validity before licensing to downstream technology users, in terms of deadweight loss (ex post) and innovation incentives (ex ante). We relate the value of such pre-licensing review to the patent's strength, i.e., the probability it would hold up in court, and to the per-unit royalty at which it would be licensed. We then apply these results using a game-theoretic model of licensing to downstream oligopolists, in which we show that determining patent validity prior to licensing is socially beneficial.

The authors argue that, although decentralization has advantages in finding low-cost solutions, these advantages are accompanied by coordination problems, which lead to delay or duplication of effort or both. Consequently, decentralization is desirable when there is little urgency or a great deal of private information, but it is strictly undesirable in urgent problems when private information is less important. The authors also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge.

the 1970s there was no organized effort to keep Kiss, or other immigrant-headed bands such as Abba or the Village People, out of the United States.) In a similar fashion, pressure from U.S. farmers and other employers may account for why it is that each year 300,000 illegal immigrants succeed in entering and finding work in the United States (Passel, Capps, and Fix 2004). For any presidential administration, globalization is likely to be a tricky subject. The gains from international economic integration are spread among a diffuse group of consumers, while the losses are concentrated in specific industries and regions. Into the debate, economists can interject dispassionate analysis of the costs and benefits associated with cross-border flows of goods, capital, and labor. On immigration and trade, the ERP gets many things right, but it falters when discussing the distributional consequences of globalization. This may be driven in part by the report's predictable but still discomforting tendency to cheerlead for the president's policy proposals. In the end, we are left with a discussion of globalization's consequences that is less balanced and complete than one might have hoped. REFERENCES

The Journal of Economic Literature (JEL) regularly reviews books of interest to the economics profession. The Economic Report of the President (ERP) falls under that purview and beginning this year, the JEL will be reviewing the ERP. Toward that end, I have asked a handful of very prominent economists to review the 2005 ERP. Reviewers were chosen to reflect expertise on what I guessed would be key issues. Reviewers were given the following instructions: The ERP in principle should provide an accurate assessment of the consensus professional views of economists on any given issue, based on the research to date. Does the discussion in the ERP in fact accurately summarize what we as economists know? Reviewers were given free rein over what material they would review in the ERP but were urged to focus on their areas of particular expertise. In the reviews that follow, Joel Slemrod reviews the discussion of tax reform. Joe Farrell reviews the ERP's chapter titled “Innovation and the Information Economy.” Gordon Hanson reviews the chapters on international trade and on immigration. Robert Hall reviews the discussion of the adverse macroeconomic impact of rising oil prices while Jonathan Gruber reviews the ERP chapter titled “Expanding Individual Choice and Control.” Many thanks to the reviewers for the quick turnaround.