When world trade is costly, a country can profitably industrialize only if its domestic markets are large enough. In such a country, for increasing returns technologies to break even, sales must be high enough to cover fixed setup costs. We suggest two conditions conducive to industrialization. First, a leading sector, such as agriculture or exports, must grow and provide the source of autonomous demand for manufactures. Second, income generated by this leading sector must be broadly enough distributed that it materializes as demand for a broad range of domestic manufactures. These conditions have been important in several historical growth episodes.

ABSTRACT We provide fresh evidence regarding the relation between compensation consultants and CEO pay. First, firms that employ consultants have higher-paid CEOs—this result is robust to firm fixed effects and matching on economic and governance variables. Second, while this relation is partly due to consultant conflicts of interest, it is largely explained by the impact consultants have on the composition and complexity of CEO pay plans; notably, this impact fully mediates the consultant-CEO pay relation. Third, firms with higher-paid CEOs and more complex pay plans are more likely to hire a consultant. Last, Say-on-Pay voting patterns suggest shareholders view positively the advice consultants provide, but only when consultants provide no other services. We also find suggestive evidence of boards “layering” new equity incentive plans over existing ones, thereby increasing the impact of composition and complexity on CEO pay beyond the premium the CEO would demand for bearing additional compensation risk. JEL Classifications: J33; M12; M52; M48. Data Availability: Data are available from the public sources cited in the text.

Gary Becker was an intellectual giant. No one had a greater impact on broadening economics and making its impact felt throughout the social sciences thanBecker. Indeed,MiltonFriedmanoncedescribedGaryBecker as the most important social scientist of the second half of the twentieth century. For those of us who knew him, he was themost creative thinker we ever encountered. It was his astounding imagination that made many of his early critics think of him as a heretic. They were correct: he was a heretic much like Luther, Copernicus, and Galileo, who transformed their worlds, just ashe transformedeconomics.Hebrought a rigorous and insightful approach to issues that were viewed as inherently noneconomic. Eventually, he won over the economics profession, detractors and all, who eventually became converts. Becker was a scientist in the true sense of the word.He believed that economics was useful only if it explained andhelped to improve theworld.He practiced what he preached and carefully analyzed all of the social problems he addressed. He was innovative yet rigorous, open to new thought yet disciplined in sticking to the established rules of analysis. Most importantly, he extended the boundaries of economics tomuch of social science.

A country's most talented people typically organize production by others, so they can spread their ability advantage over a larger scale. When they start firms, they innovate and foster growth, but when they become rent seekers, they only redistribute wealth and reduce growth. Occupational choice depends on returns to ability and to scale in each sector, on market size, and on compensation contracts. In most countries, rent seeking rewards talent more than entrepreneurship does, leading to stagnation. Our evidence shows that countries with a higher proportion of engineering college majors grow faster; whereas countries with a higher proportion of law concentrators grow slower.

The Market for College Graduates and the Worldwide Boom in Higher Education of Women by Gary S. Becker, William H. J. Hubbard and Kevin M. Murphy. Published in volume 100, issue 2, pages 229-33 of American Economic Review, May 2010

Although exercise prices for executive stock options can be set either below or above the grant-date market price, in practice virtually all options are granted at the money. We offer an economic rationale for this apparent puzzle, by showing that pay-to-performance incentives for risk-averse undiversified executives are typically maximized by setting exercise prices at (or near) the grant-date market price. We provide an operationally useful alternative to Black-Scholes (1973) for the purpose of both valuing executive stock options and measuring the incentives created by options. Our framework has implications not only for exercise-price policies, but also for indexed options, option repricings, exchanges of cash for stock-based compensation, and the design of bonus plans.

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.

The authors' estimates of the pay-performance relation (including pay, options, stockholding, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 changes in shareholder wealth. Although the incentives generated by stock ownership are large relative to pay and dismissal incentives, most CEOs hold trivial fractions of the firms' stock, and ownership levels have declined over the past fifty years. The authors hypothesize that public and private political forces impose constraints that reduce the pay-performance sensitivity. Declines in both the pay-performance relation and the level of CEO pay since the 1930s are consistent with this hypothesis. Copyright 1990 by University of Chicago Press.

Academics, consultants, and practitioners have long advocated bringing the market inside the firm. For example, in the 1950s and 1960s economists proposed that the transfer-pricing problem should be solved by charging market prices for internal transactions. Similarly, in the 1980s, financial economists suggested that the capital-allocation problem should be solved by charging the external cost of capital for internal investments. And wave after wave of organizational restructuring has advocated radical decentralization, empowerment, “intrapreneurship, ” and the like—in short, making employees feel like owners. Proponents of making transactions within firms more market-like often seem to ignore the factors that brought these transactions inside firms in the first place. But Bengt Holmstrom and Paul Milgrom (1991, 1994), Holmstrom and Jean Tirole (1991), and Holmstrom (1999) [hereafter collectively HMT] remind us that in some cases integration is efficient precisely because it eliminates market incentives. In such cases, bringing the market inside the firm would clearly be undesirable. In this paper we show that bringing the market inside the firm is often not feasible, even if it would be desirable. More precisely, if some aspects of the market transaction are non-contractible (as we define below) then it is impossible to replicate spot-market payoffs inside a firm. This result would be trivial if the firm’s only instruments were court-enforceable contracts: it is impossible (by definition) for such contracts to replicate payoffs that were non-contractible in a spot market. Our

This paper investigates the implications of social rewards on the allocation of talent in society and consequently on the process of economic growth. The authors consider two sources of heterogeneity among workers: nonwage income and innate ability. A greater emphasis on status may induce the 'wrong' individuals, that is, those with low ability and high wealth, to acquire schooling, causing workers with high ability and low wealth to leave the growth-enhancing industries. This crowding-out effect, taken alone, discourages growth. Growth may be enhanced by a more egalitarian distribution of wealth, which reduces the demand for status. Copyright 1996 by University of Chicago Press.