First, a model of horizontally and vertically integrated firms is developed. These firms are then embedded in a general equilibrium model of trading countries. It is shown how multinational corporations emerge as a result of differences across countries in factor compositions. Intersectoral, intraindustry, and intrafirm trade can coexist, and intrafirm trade takes place in invisibles (headquarter services) and intermediate inputs. It is shown how the various trade components depend on the structure of the world economy. The model predicts trade patterns which are close to observed trade patterns.
This paper investigates perfect equilibrium in a model of a race in which two players are competing for an indivisible prize. The winner is the first player to reach the finishing line. It is shown that the behaviour of the winner of the race is often exactly as if he were the only player: the rival makes no difference. Even if competition does affect the winner's behaviour, it does so only in the first stage of the race and not thereafter. It is shown how several factors combine to determine which player will win: relative valuations of the prize, discount rates, efficiency at making progress and initial distances from the finishing line. Insofar as the model applies to patent races, it suggests that the potential competition faced by one firm in a patent race (e.g. an incumbent monopolist) may be of little or no consequence.
Central planning of production is usually performed under asymmetric information which leads to use of an incentive scheme. As the planner revises the scheme over time to take into account information provided by the firm's performance, this induces firms to underproduce to avoid more demanding schedules in the future—the ratchet effect. This paper explores this phenomenon under the realistic assumption that the planner cannot commit himself to a revision procedure. We show that the ratchet effect exists, in the sense that the planner may choose a scheme which is suboptimal from a static viewpoint in order to induce revelation, with the marginal price of output exceeding its optimal static value.
This paper presents models in which one agent must decide whether to trust another, whose motives are uncertain. Reliability can only be communicated through actions. In this context, it pays for people to build a reputation based on reliable behaviour; someone becomes credible by consistently providing accurate and valuable information or by performing useful services. The theory provides a justification for long-term arrangements without binding contracts. It also describes those situations where it pays an agent to cash in on his reputation.
We study the adoption of a new technology to illustrate the effects of preemption in games of timing. We show that the threat of preemption equalizes rents in a duopoly, but that this result does not extend to the general oligopoly game. If the gain to preemption is sufficiently small, then the optimal symmetric outcome, which involves “late” adoption, is an equilibrium. This contrasts with Reinganum's result that in precommitment equilibria there must be “diffusion”. We develop a new and richer formalism for modeling games of timing, which permits a continuous-time representation of the limit of discrete-time mixed-strategy equilibria.
In a simple model of borrowing and lending with asymmetric information we show that the optimal, incentive-compatible debt contract is the standard debt contract. The second-best level of investment never exceeds the first-best and is strictly less when there is a positive probability of costly bankruptcy. We also compare the second-best with the results of interest-rate-taking behaviour and consider the effects of risk aversion. Finally we provide conditions under which increasing the borrower's initial net wealth must reduce total investment in the venture.
Edward Lazear (1983) presents a model in which the number of unionized workers in an industry is endogenously determined by the utility-maximizing workers themselves. Hence in his model union firms and nonunion firms coexist. He assumes that the nonunion wage adjusts so that the labor market clears and full employment prevails. The purpose of this note is to examine the possibility of unemployment in Lazear's model. Of all the possible rigidities in the labor market that could lead to unemployment, the most natural one is the existence of minimum wage legislation.' It will be shown that the imposition of a minimum wage may induce the formation of a union. Furthermore, an increase in the minimum wage will result in a higher union wage, but decrease aggregate wage income. Finally, I investigate the influence of the elasticity of demand for labor on some indicators of union power. Henceforth it will be assumed that firms cannot pay a wage below some specified level W. This entails some modification of Lazear's model which is now briefly presented. The variables W, and WN are the union wage and the nonunion wage, respectively. Ci is the cost to firm i of blocking unionization of its workforce with Ci g(Ci) and G(C) the probability that firm i's blocking cost does not exceed C; apart from this disparity in blocking costs, all firms are identical. d(W) is the demand for labor by a firm faced with wage W and 11(W) is its profit outside of blocking costs. Define I *(W,, WN) --H1(WN)-11 (WU,) and firm i will block unionization when 1 *(W,, WN) > Ci, hence the probability that a firm will block is G[11*(Wi,, WN)]. The nunber of firms is S and R is the number of workers. The labor market equilibrium condition (1) of Lazear must be modified as