Knowledge that Transforms

Using Tobin's q as a measure of performance, we seek to estimate the relative importance of industry, focus, and share effects in determining firm performance. Our methods are analogous to those of Richard Schmalensee and, like him, we find that industry effects account for the majority of the explained variance. However, we also find that firm effects exist in the form of focus effects, that is, narrowly diversified firms do better than widely diversified firms. We interpret this finding as consistent with profit maximization by firms with different factor endowments.

Tests of weak-form efficiency of the market for single family homes are performed using data on repeat sales prices of 39, 210 individual homes, each for two sales dates. Tests were done for Atlanta, Chicago, Dallas, and San Francisco/Oakland for 1970-86. While evidence for seasonality in real housing prices is weak, we do find some evidence of inertia in housing prices. A city-wide real log price index change in a given year tends to be followed by a city-wide real log price index change in the same direction (and between a quarter to a half as large in magnitude) in the subsequent year. However, the inertia cannot account for much of the variation in individual housing real price changes. There is so much noise in individual housing prices relative to city-wide price index changes that the R[squared] in forecasting regressions for annual real price change in individual homes is never more than .04.

Contrary to the usual assumption made in most oligopoly models, relations among firms are seldom of a wholly cooperative or noncooperative type: in many situations, they compete in some fields, while they cooperate in others. An important example is the case of cooperative research efforts bringing fierce competitors together. Two types of agreement are observed. First R&D cooperation can take place at the so-called “precompetitive stage”: companies share basic information and efforts in the R&D stage but remain rivals in the market-place.1 A second type of agreement involves an extended collusion between partners, creating common policies at the product level. The usual justifications of this extension are the difficulties of protecting intellectual property. The idea is then to allow partners who have achieved inventions together, to also control together the processes and products which embody the results of their collaboration, in order to recuperate jointly their R&D investments.2 What could be expected from these types of agreement is a reduction in R&D expenditures, because of less wasteful duplication, and a reduction of total production, because of more ∗Reprinted from The American Economic Review, 78(5), 1133-1137, 1988. †Center for Operations Research & Econometrics, 1348 Louvain-la-Neuve, Belgium. We are grateful to Jean

HD28 .M414 no.2062-88,

In the presence of aggregate demand spillovers, an imperfectly competitive form's profit is positively related to aggregate income, which in turn rises with profits of all firms in the economy. This pecuniary externality makes a dollar of a firm's profit raise aggregate income by more than a dollar since other firms' profits also rise, and in this way gives rise to a "multiplier." Since such multipliers are ignored by firms making investment decisions, privately optimal investment decisions under uncertainty will not in general be socially optimal. Under reasonable conditions, investment is too low.