Reviews the book "A Review of Innovative Approaches to College Teaching," by Beatrice Gross and Ronald Gross

Regulatory lag is generally credited with providing monetary incentives for the adoption of cost-saving technological changes by regulated firms. Because regulators can not instantaneously adjust price ceilings in response to cost changes, these incentives are inherent to the process of price regulation in a dynamic world. A firm which decreases production costs through technological innovation will enjoy excess profits until the regulators lower price to a level consistent with the new conditions.' The longer the delay before regulatory response to a decrease in cost, the greater are the profits which can be derived from a cost reduction, and, therefore, the greater is the incentive for adoption of technological change.2 The passive nature of this incentive mechanism is an important characteristic. Although regulatory agencies typically have authority to force price decreases upon firms which do not take advantage of potential cost savings, this power is limited by the difficulty of proving that a firm is laggard, rather than the victim of unfortunate circumstances. Thus, the regulated firm which foregoes potential profit from adopting a costsaving innovation today may generally reap that profit at some convenient time tomorrow. Indeed, it is the main contention of this paper that, in many circumstances, a regulated monopolist can maximize the present value of profits only by delaying adoption of an innovation. That is, rather than completely adopting a cost-saving innovation when it becomes available, a profit-maximizing regulated firm will choose to adopt the innovation only gradually through time. The profitability of such delaying procedure may be illustrated by a simple example. Consider a situation in which the price of a firm's product is fixed by a regulatory authority, but periodically adjusted according to the following cost-plus-markup scheme. At each review, price for the following period is set equal to average cost of the previous period plus an allowed markup. That is, price in period i + 1 is set equal to m times average cost in period i (m ) 1). This situation is illustrated in Figure 1. A firm is initially producing output QO at cost CO(QO), with price set by the regulators at mCO(QO)/QO. Suppose a cost-saving innovation is discovered, which, if employed, would decrease average production cost to C1(Q)/Q. If the firm were to adopt this innovation immediately, it would earn a profit equal to the area of the rectangle ABCD in Figure IA. At the next regulatory review, price would be lowered to the level m times the new average cost (i.e., to P1), and profit would fall to that amount represented by the area AEFG. This amount of profit would be earned each period thereafter. However, suppose that the firm were to adopt this innovation in two steps rather than completely adopting the innovation when it first becomes available. This option is sketched in Figure lB. In the initial period, the firm adopts the innovation throughout approximately half its operations, thereby lowering average cost only to OH. In the next period, the firm completes the adoption process, lowering average cost to the final level OA. Although this procedure would yield profit equal only to HICD in the initial period, it would result in a price in the next period equal to P1 (i.e., equal to m times OH). Since average cost in that period would fall to OA, profit would equal AJKL. In the next period, price would be at the new equilibrium level OG, and profit would equal AEFG. This amount of profit would be earned each period thereafter. Given the demand and cost functions illustrated in Figure 1, the second alternative *Assistant professor of economics, Vanderbilt University. 'See William Baumol, and Alfred Kahn, ch. 2. 2See Elizabeth Bailey

Edwin Mansfield, Composition of R and D Expenditures: Relationship to Size of Firm, Concentration, and Innovative Output, The Review of Economics and Statistics, Vol. 63, No. 4 (Nov., 1981), pp. 610-615

A. W. Sametz, Accelerating Inflation, Technological Innovation, and the Decreasing Effectiveness of Banking Regulation: Discussion, The Journal of Finance, Vol. 36, No. 2, Papers and Proceedings of the Thirty Ninth Annual Meeting American Finance Association, Denver, September 5-7, 1980 (May, 1981), pp. 393-395

To explain the evolution of U.S. deposit institutions and markets in the 1960sand 1970s, we feed into the regulatory dialectic assumptions about the objectives of federal banking regulation and about outside forces that disturb the adjustment process. The disturbing exogenous forces are accelerating change in the technological and market environment of commercial banking and increasing uncertainty concerning the future speed of enviromental change. We hypothesize that, in the face of these environmental changes, the adaptive efficiency shown on average by deposit-institution managers is greater than that shown by managers of the several competing banking agencies. Incorporating this differential adaptive capacity into the regulatory dialectic helps us to understand how increases in the pace of environmental change and in the degree of environmental uncertainty led regulatee responses to come more quickly and regulatory responses to come more slowly. The bottom line is that, when the environment changes rapidly and becomes more uncertain, traditional forms of U.S. banking regulation can be overwhelmed by technological and regulation-induced innovation

THE theoretical and empirical investigations of the relationship between market structure and the firm's incentive to invent and innovate have concentrated on the effects of the structure of the supply side of the market. This focus on the supply side originated in Schumpeter's controversial hypothesis that current market power provided the necessary conditions and future market power provided the incentive for technical change (Schumpeter, 1950). This hypothesis stimulated a vast number of theoretical refinements and empirical tests of relations between research and development activity (R&D) and supply side characteristics such as concentration, firm size, and diversification. This literature has been well summarized by Kamien and Schwartz (1975) and Scherer (1980). The analysis of the effects of the buyer market structure on the selling industry conduct and performance has been limited, both theoretically and empirically. Stigler (1964) modeled the effects of the size distribution of buyers on price competition in oligopoly. Telser (1964) devel-, oped a theory of messages in which he suggested that advertising would increase when buyers were many and small. Lustgarten (1975) tested the effects of buyer market structure on price cost margins and advertising and found the relations suggested by Stigler and Telser. Invention and innovation are forms of competition which, like price and advertising, will be affected by both buyer market structure and seller market structure. However, unlike price and advertising competition, there have not been explicit attempts to establish theoretical and empirical relations between buyer market structure and inventive and innovative activity. The effects of buyer market structure on the selling industry's incentive to invent and innovate is relevant to interpreting the effects of seller market structure on this effort. A number of previous studies of the effects of seller market structure on technical change have found that seller concentration may have a slight positive impact on inventive and innovative effort (Kamien and Schwartz, 1975, p. 20). Even this weak relation may be due to not controlling for buyer market structure. If Galbraith's (1952) countervailing power hypothesis is correct (Lustgarten, 1975, p. 128), concentration in the buyer and seller markets may be positively correlated. If buyer market concentration is positively related to inventive and innovative effort in the selling industry, the empirical estimate of the partial effect of seller concentration will be biased upward. This paper investigates the effect of buyer market structure on R&D effort. Section II draws together the literature that is relevant to the issue of the relation between buyer market structure and seller inventive and innovative activity. Section III develops a simultaneous equation model of R&D activity where R&D, advertising and concentration are endogenous variables. Section IV uses data on scientific and engineering inputs to test this model. Section V summarizes these results

In the last few years, several innovations have appeared in mortgage finance which are designed to improve the flow of funds into mortgage lending. Among this group, The Federal National Mortgage Association (FNMA) remains the intermediary which handles the largest share of most mortgage lenders' placements. As a private corporation chartered by Congress and owned by stockholders, FNMA provides a national secondary market facility for government-backed (FHA/VA) and conventional mortgages. Through its secondary market operations, FNMA furnishes a source of liquidity for mortgage lenders with the major portion of this support provided through the Free Market System (FMS) auctions. Through its issuance of forward purchase commitments, the FNMA assures lenders of a permanent investor (at a set yield) for specified periods of time, regardless of changing money market and housing conditions

Conventional growth literature fails to incorporate technical change and investment as endogenous variables; Marxian growth literature is bedeviled by indeterminacies surrounding technical change and the rate of profit. Both sets of problems are addressed using a two-sector (capital good, consumer good) model, in which capitalists accumulate coexisting vintages of techniques. The parameters of the latest technique are determined by maximizing the innovator's profit, constrained by diminishing returns to mechanization. The model describes the differential impact of goods-, capital-, and labor-market equilibrium on the sectors, as the economy converges to a proportional-growth path. Conditions are identified under which prices approach labor values over time; and under which Marx's "rising composition" and "falling profit rate" tendencies are realized