SIEPR Discussion paper No. 99-21
Telecommunications Privatization in Developing Countries: The Real Effects of Exclusivity Periods
Scott J. Wallsten
May 2000

The telecommunication sector around the world has been undergoing dramatic reforms since the 1980s. Developing countries have been privatizing state-owned firms and slowly introducing competition into the telecom sector. We have a good theoretical understanding of the effects of telecom privatization and some empirical work is beginning to emerge, as well. In general, privatization, especially when combined with effective regulatory institutions, improves telecom service. However, we have almost no empirical information on the real effects of the details of the privatization transaction. In particular, many countries grant the privatized telecom firm a multi-year exclusivity period; that is, the government allows the newly-privatized firm to operate as a monopoly for some number of years. The exclusivity period is typically granted to increase the sale price of the firm and thus government revenues. While private investors are almost certainly willing to pay more for firms that can earn monopoly profits, a monopoly is less likely to improve service than is a firm operating in a competitive environment. As a result, the exclusivity period may boost government revenues at the cost of delaying improvements in telecom services to the population. Largely because data is scarce, to date no empirical studies have attempted to systematically estimate the effects of these exclusivity periods. In this paper I use an original, new dataset to explore the real effects of exclusivity periods. The Infrastructure Privatization Database is jointly sponsored by Stanford University and The World Bank to analyze the impact of regulatory institutions and privatization policies on utility performance. Using this combination of firm- and country-level cross-section and panel data, I estimate the effect of exclusivity periods on firms’ sale prices and also on sector performance in terms of network penetration. The results confirm conventional wisdom: exclusivity periods significantly increase the sale price of the firm, but substantially decrease network growth.

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SIEPR Discussion paper No. 99-20
Should the Government Subsidize Supply or Demand in the Market for Scientists and Engineers?
Paul Romer
May 2000

This paper suggests that innovation policy in the United States has erred by subsidizing the private sector demand for scientists and engineers without asking whether the educational system provides the supply response necessary for these subsidies to work. It suggests that the existing institutional arrangements in higher education limit this supply response. To illustrate the path not taken, the paper considers specific programs that could increase the number of scientists and engineers available to the private sector.

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SIEPR Discussion paper No. 99-19
The Response of Employees to Severance Incentives:
The University of California's Faculty, 1991-1994
John Pencavel
April 2000

In response to huge budgetary shortfalls in the early 1990s, the University of California offered its older and longer service employees financial inducements to leave. This paper analyzes the responses of UC's faculty to three waves of buyout incentives. It is estimated that an individual presented with ten percent higher severance benefits has a seven to eight percent higher probability of quitting. However, quit probabilities are very difficult to forecast with accuracy. This casts doubt on arguments that maintain that buyouts are superior to employer-initiated layoffs as a mechanism to effect large employment changes.

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SIEPR Discussion paper No. 99-18
The "State" of Universal Service
Gregory L. Rosston and Bradley S. Wimmer
April 2000

The introduction of competition forces regulators to address the historical practice of using of implicit cross subsidies to maintain uniformly low local telephone service rates. The Federal Communications Commission recently adopted rules to remove a portion of these implicit subsidies by adopting an explicit universal service program. This program, however, only addresses a small portion of the problem and leaves to the states problems associated with intrastate cross subsidies. In this paper we examine several alternative universal service programs that states may adopt. Overall, we find that universal service programs that base subsidy dollars on the cost of providing service have little effect on telephone penetration rates and result in large taxes, which distort market outcomes and drive those paying into the system from the network. Large universal service programs also cause competitive distortions. Furthermore, we find that cost-based mechanisms do an equally poor job when we use normative criteria, such as the effect the programs have on the distribution of income.

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SIEPR Discussion paper No. 99-17
Executive Compensation and Firm Performance: Big Carrot, Small Stick
Scott J. Wallesten
March 2000

The statistical link between executive compensation and firm performance is well established. I explore two features of the relationship that have not yet been addressed empirically. First, does the relationship itself change depending on firm performance? I find that, on average, executives are rewarded in good years but are not punished in bad years. This result is consistent with a model that attempts to induce risk-taking behavior by rewarding good performance and limiting downside punishment. Second, does the relationship change with the executive’s rank in the company? I find that the top executive’s compensation is most strongly linked with performance, the second-highest ranking executive less so, and the third-highest even less. This result is consistent with linking compensation to performance only to the extent that the employee has some direct influence on it.

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SIEPR Discussion paper No. 99-016
The Dow Jones Average: The Impact of Fixing Its Flaws
John B. Shoven and Clemens Sialm
February 2000

The Dow Jones Industrial Average is a flawed index. The index uses price weights instead of conceptually superior market valuation weights, the companies included in the index are not chosen systematically and are not very representative of the U.S. market, and the index ignores returns from dividends. This paper shows that alternative stock price indices which use superior weighting methods and a more systematic inclusion criterion perform very similarly to the Dow Jones Industrial Average. However, ignoring dividends underestimates the long-run returns earned by stock market investors dramatically. If Dow Jones & Co. had included dividend returns in the DJIA when it was reformed in 1928, the index would be over 250,000 today.

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SIEPR Discussion paper No. 99-15
Economic Measurement: Progress and Challenges
Michael J. Boskin
January 2000

The development of the concepts and measurements of national income are among the most important achievements of modern economics. However, substantial improvements can and should be made in the traditional domain of the national accounts. The Commerce Department’s Bureau of Economic Analysis has made numerous improvements in recent years, including changing the focus from gross national product (GNP) to gross domestic product (GDP), chain weighting, using technically improved (Fisher Ideal) price and output indexes, adopting the system of national accounts (SNA) and initiating work on a variety of satellite accounts. In the postwar period, BEA has responded to the large structural changes in the economy, and the need for greater detail and frequency of estimates. Additional work should be done to improve measurement in a number of areas: the growth of hard-to-measure services, new products, quality improvements, technology and innovation, time use, international trade and capital flows, the impact of new firms, financial innovations, changes in the organization of production and distribution, capital accounts and demography, to name a few of the most important.

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SIEPR Discussion paper No. 99-13
Asset Allocation and Risk Allocation: Can Social Security Improve its Future Solvency Problem by Investing in Private Securities?
Thomas E. MaCurdy
January 2000

This paper examines the economics of investing the central trust fund of Social Security in private securities. We note that switching from a policy of having the trust fund invest solely in special issue Treasury bonds to one where some of the portfolio holds common stocks amounts to an asset swap. Such an asset swap does not increase national saving, wealth or GDP. We also show that it is far from a sure thing in terms of improving the finances of the Social Security system. The asset swap is deemed successful if the stock portfolio generates sufficient cash to pay off the interest and principal of the bonds and still have money left over. It is deemed a failure otherwise. By using historical data and a bootstrap statistical technique, we estimate that the exchange of ten or twenty year bonds for a stock portfolio would worsen social security’s finances roughly twenty to twenty-five percent of the time. Further, failures are autocorrelated meaning that if the strategy fails one year it is extremely likely to fail the next. Such high failure rates imply that the defined benefit structure of benefits becomes less credible with stocks in the trust fund.

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SIEPR Discussion paper No. 99-11
Understanding Digital Technology's Evolution and The Path of Measured Productivity Growth: Present and Future in the Mirror of the Past
Paul A. David
January 2000

Three styles of explanation have been advanced by economists seeking to account for the so-called "productivity paradox". The coincidence of a persisting slowdown in the growth of measured total factor productivity (TFP) in the US, since the mid-1970's, with the wave of information technology (It) innovations, is said by some to be an illusion due to the mismeasurement of real output growth; by others to expose the mistaken expectations about the benefits of computerization; and by still others to reflect the amount of time, and the volume of intangible investments in "learning", and the time required for ancillary innovations that allow the new digital technologies to be applied in ways that are reflected in measured productivity growth. This paper shows that rather than viewing these as competing hypotheses, the dynamics of the transition to a new technological and economic regime based upon a general purpose technology (GPT) should be understood to be likely to give rise to all three "effects." It more fully articulates and supports this thesis, which was first advanced in the "computer and dynamo" papers by David (1990, 1991). The relevance of that historical experience is re-asserted and supported by further evidence rebutting skeptics who have argued that the diffusion of electrification and computerization have little in common.

New evidence is produced about the links between IT use, mass customization, and the upward bias of output price deflators arising from the method used to "chain in" new products prices. The measurement bias due to the exclusion of intangible investments from the scope of the official national product accounts also is examined. Further, it is argued that the development of the general-purpose PC delayed the re-organization of businesses along lines that would have more directly raised task productivity, even though the technologies yielded positive "revenue productivity" gains for large companies. The paper concludes by indicating the emerging technical and organizational developments that are likely to deliver a sustained surge of measured TFP growth during the decades that lie immediately ahead.

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SIEPR Discussion paper No. 99-9
Tax Externalities of Equity Mutual Funds
Joel M. Dickson, John B. Shoven, and Clemens Sialm
December 1999

Investors holding mutual funds in taxable accounts face a classic externality. The after-tax return of their investment depends on the behavior of others. In particular, redemptions may force the mutual fund to sell some of its equity positions in order to pay off the liquidating investors. As a result, the mutual fund may be forced to distribute realized capital gains to its shareholders. The taxes of investors staying with the fund are accelerated by the actions of those leaving the fund. On the other hand, new investors convey a positive externality upon existing investors by diluting the unrealized capital gain position of the fund. The simulations presented in this paper show that these externalities are important determinants of the after-tax performance of equity mutual funds. Mutual fund managers can significantly influence the magnitude of these externalities by choosing tax-efficient accounting techniques and investment policies.

The authors would like to thank Olivia Lau of Stanford for superb assistance with this research. We also have benefited from discussions, information and ideas from Fred Grauer, Keith Lawson, Davide Lombardo, Jim Poterba, John Rea, Douglas Shackelford, and conference participants at the NBERÕs "The Economic Effects of Taxation." Research support from the Smith-Richardson Foundation and the NBER are gratefully acknowledged. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of The Vanguard Group Inc., its affiliates, or its Board of Directors.

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SIEPR Discussion paper No. 99-8
Winners and Losers from the Universal Service Subsidy Battle
Bradley S. Wimmer and Gregory L. Rosston
December 1999

The FCC recently adopted a new universal service plan to comply with the mandates of the Telecommunications Act of 1996 and the introduction of competition that make implicit cross-subsidy no longer viable.

The new universal service plan uses a detailed forward-looking cost model to estimate the cost of providing service for each of 12,493 wire centers across the country. Based on the model, the Commission will provide new universal service funding to 7 states. If states adopt a similar plan to fund high cost areas, it will cost about $1.7 billion more per year than a targeted subsidy to low-income households.

Combining the results of the universal service cost model with U.S. Census demographic data allows analysis of what different groups receive universal service subsidy if the states adopt similar plans. Less than 20 percent of households with incomes under $20,000 per year would receive any subsidy dollars — the other 80 percent of these low-income households would pay into the system. At the same time, many high income households would receive support. As expected, Blacks, Hispanics and Asians are less likely than Whites and Native Americans to receive high cost support because they tend to live in more urban areas.

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SIEPR Discussion paper No.99-5
Currency Substitution, Speculation, and Financial Crises: Theory and Empirical Analysis
Yasuyuki Sawada and Pan A. Yotopoulos
November 1999

We extend the "fundamentals model" of currency crisis by incorporating the currency substitution effects explicitly. In a regime of free foreign exchange markets and free capital movements the reserve (hard) currencies are likely to substitute for the local soft currency in agents' portfolia that include currency as an asset. Our model shows that, controlling for the fundamentals of an economy, the more pronounced the currency substitution is in a country, the earlier and the stronger is the tendency for the local currency to devalue. This is especially true if indebtedness, public and private, fail to decrease as currency substitution occurs. Moreover, the use of the required reserve ratio is indicated as an adjustment device to moderate short-term capital inflows and control the level of indebtedness.

The model is implemented by constructing a currency-softness index. Two empirical findings emerge. First, there is a negative relationship between the currency-softness index and the degree of nominal exchange rate devaluation. This indicates that soft currency countries have a systematic tendency to have under-valued currency. Second, there is a systematic negative relationship between the softness of a currency and the level of economic development. The policy recommendations of the paper refer to the means of achieving "moderately repressed exchange rates," and thus helping diffuse the pressure for devaluation of soft currencies that is exogenously determined through the opportunities afforded for currency substitution in a globalization environment.

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SIEPR Discussion paper No.99-4
Free Currency Markets, Financial Crises and the Growth Debacle: Is There a Causal Relationship?
Pan A. Yotopoulos and Yasuyuki Sawada
November 1999

The paper develops an alternative hypothesis that attributes collateral responsibility for the recent spate of financial crises to a basic flaw of the architecture of the international financial system, free markets for foreign exchange. A valid positional distinction between reserve/ hard and soft currencies, based on reputation, accounts for the systematic substitution of the former currencies for a country's soft currency in liquid asset holdings. The result of this "asymmetric reputation" in an environment of free currency markets is the systematic devaluation of soft currencies. Moreover, bubbles, devaluations and financial crises, far from being self-correcting monetary phenomena, can lead to sharp contractions in the economy through the misallocation of resources in competitive devaluation trade, as opposed to comparative advantage trade. In a case that is parallel to asymmetric information and incomplete credit markets, the appropriate policy intervention in asymmetric-reputation driven incomplete currency markets is maintaining mildly repressed exchange rates. The operational definition of "mild" is imposing restrictions on currency substitution, whether it is home-grown or it is the result of foreign financial capital taking short positions on the local currency.

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SIEPR Discussion paper No. 99-014
The Vickrey Lecture: From Edgeworth to Vickrey To Mirrlees
Michael J. Boskin
October 1999

William Vickrey's Agenda for Progressive Taxation is perhaps his best-known work. It stands roughly half way between Edgeworth and Mirrlees, both historically and intellectually. Edgeworth argued that the optimal tax (and transfer) system equalized incomes by taxing above-average incomes at 100 percent and transferring the proceeds to those below average. Mirrlees argued optimality in the presence of disincentive effects, which Edgeworth ignored, placing severe limits on high tax rates. Vickrey proposed 21 tax reforms to make a practical system of personal progressive taxation workable. The two most famous were cumulative lifetime averaging and decreasing power succession taxes. This paper reviews the proposals in light of subsequent intellectual and historical developments. Many of the issues Vickrey explored are relevant today whether the tax system is flat or progressive and whether the base is income or consumption.

SIEPR Discussion paper No. 99-10
The Silicon Valley-Hsinchu Connection: Technical Communities and Industrial Upgrading
AnnaLee Saxenian
September 1999

Silicon Valley in California and the Hsinchu-Taipei region of Taiwan are among the most frequently cited 'miracles' of the information technology era. The dominant accounts of these successes treat them in isolation, focusing either on free markets, multinationals or the state. This paper argues that the dynamism of these regional economies is attributable to their increasing interdependencies. A community of US-educated Taiwanese engineers has coordinated a decentralized process of reciprocal industrial upgrading by transferring capital, skill, and know-how and by facilitating collaborations between specialist producers in the two regions. This case underscores the significance of technical communities and their institutions in diffusing ideas and organizing production at the global as well as the local level.

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SIEPR Discussion paper No.99-1
Is Public R&D a Complement of Substitute for Private R&D? A Review of the Economic Evidence
Paul A. David, Bronwyn H. Hall, and Andrew A. Tool
September 1999

Is public R&D spending complementary and thus “additional” to private R&D spending, or does it substitute for and tend to “crowd out” private R&D? Conflicting answers are given to this question. We survey the body of available econometric evidence accumulated over the past 35 years. A framework for analysis of the problem is developed to help organize and summarize the findings of econometric studies based on time series and cross-section data from various levels of aggregation (laboratory, firm, industry, country). The findings overall are ambivalent and the existing literature as a whole is subject to the criticism that the nature of the “experiment(s)” that the investigators envisage is not adequately specified. We conclude by offering suggestions for improving future empirical research on this issue.

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SIEPR Discussion paper No. 99-22
Bequests as Signals: An Explanation for the Equal Division Puzzle
B. Douglas Bernheim and Sergei Sererinov
August 1999

In the United States, more than two-thirds of decedents with multichild families divide their estates exactly equally among their children. In contrast, intra vivos gifts are usually unequal. These findings challenge the validity of existing theories regarding the determination of intergenerational transfers. In this paper, we develop a theory that accounts for this puzzle, based on the notion that the division of bequests provides a signal about a parent’s altruistic preferences. The theory can also explain the norm of unigeniture, which prevails in other societies. (JEL D10, H31)

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SIEPR Discussion paper No.99-3 (see Paper No. 01-005 for expanded version
American Macroeconomic Growth in the Era of Knowledge-Based Progress: The Long-Run Perspective
Moses Abramovitz and Paul A. David
August 1999

This chapter focuses on the nature of the macroeconomic growth process that has characterized the United States experience, and manifested itself in the changing pace sources of the rise real output per capita in U.S. economy during the past two hundred years. Our main interest is indeed, the twentieth century, but we believe that its major characteristics and the nature of the underlying forces at work are clearly seen in comparisons between the century just past and the one that came before.

A key observation that emerges from the long-term quantitative economic record is that the proximate sources of increases in real gross domestic product per capita in the century between 1889 and 1989 were quite different from those which obtained during the first one hundred years of American national experience. Baldly put, the national economy moved from margin has become more and more dependent upon the acquisition and exploitation of technological and organizational knowledge.

SIEPR Discussion paper No. 99-12
The Economic Theory of Public Enforcement of Law
A. Mitchell Polinsky and Steven Shavell
July 1999

Public enforcement of law -- the use of public agents (inspectors, tax auditors, police, prosecutors) to detect and to sanction violators of legal rules -- is a subject of obvious generate, the extent of compliance with the income tax code, and the incidence of theft, robbery and other crimes.

The earliest economically-oriented writing in the subject of law enforcement dates from the eighteenth century contributions of Montesquieu (1748), Cesare Beccaria (1767), and, especially Jeremy Bentham (1789), whose analysis of deterrence was sophisticated and economic scholarship until the late 1960s, when Gary S. Becker 1968 published a highly influential article. Since then, well over two hundred articles have been written on the economics of enforcement.

The main purpose of our article is to present the economic theory public enforcement of law in a systematic and comprehensive way. The theoretical core of our analysis (section 2 through 4) answers the following basic questions: How much of society's resources should be devoted to apprehending injuries? If an injurer is caught, should the rule of liability be strict or fault-based? Should the form of the sanction be a fine, an imprisonment term, or a combination of the two? At what level should sanctions be set?

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SIEPR Discussion paper No. 99-7
Local and Global Competition in Information Technology
Timothy Bresnahan and John Richards
June 1999

We examine the implications of changing competitive dynamics in global information and communications technology (ICT) markets for government demand-steering policies whose goal is local rents. Both computing and telephony are undergoing changes in global industry structure and changes in the nature of competition. The convergence of computing and telephony and the rapid technological change (and accompanying technological uncertainty) driving this convergence reinforce trends toward vertical competition. The emergence of global ICT markets lowers entry barriers, likely encouraging government- supported local entrants into global ICT markets. There are, however, strongly offsetting disadvantages. The underlying economics of ICT markets under vertical competition will work to reinforce the dominant position of U.S.-based incumbents in many segments. The prospects for exports, command of rent-related standards, and large rents from exports are not very bright. We expect to see far more demand-steering attempts than successes.

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SIEPR Discussion paper No.98-6
"The Contribution of Public Science to Industrial Innovation: An Application to the Pharmaceutical Industry"
Andrew A. Toole
June 1999

This paper has been revised and is now listed as SIEPR Discussion Paper No. 00-007

SIEPR Discussion paper No. 98-4
The ABC's of Universal Service: Arbitrage, Big Bucks and Competition
Gregory L. Rosston and Bradley S. Wimmer
April 1999

The introduction of competition requires a re-thinking of policies. Current proposals for a new universal service, however, contain many problems that create artificial incentives that will cause firms to waste money and do not necessarily reward firms that best serve customers. The problems are inherent in the methods to collect taxes to fund the universal service programs and the manner in which universal service funds will be disbursed. The majority of these problems stem from attempts to create artificial regulatory and jurisdictional distinctions and will only disappear when regulators and politicians realize the efficiency and consumers are better served in a competitive environment by an economically rational system of transparent subsidies rather than the web of implicit cross subsidies. In this paper, we examine the sources for these inefficient distortions and propose changes to the current and proposed programs that will better achieve a goal of universal service with a minimum of distortion in the marketplace. Distortions arise from arbitrary categorizations of services. For example, services are labeled "interstate" or "intrastate." Because each jurisdiction imposes its own taxes, firms have an incentive to reconfigure their service offerings simply to minimize taxation. Both tax rates and distribution mechanisms create incentives for wasteful arbitrage. There are two ways to cure the problem: to prevent arbitrage through regulation or to reduce the incentive for arbitrage by minimizing the level of taxes. We argue that the second solution will be much better for communications competition and universal service.

SIEPR Discussion paper No. 98-3
Early Twenthieth Century Productivity Growth Dynamics: An Inquiry into the Economic History of "Our Ignorance"
Paul A. David and Gavin Wright
March 1999-Revised April 1999

A marked acceleration of total factor productivity (TFP) growth in U.S. manufacturing followed World War I. This development contributed substantially to the absolute and relative rise of the domestic economy's aggregate TFP residual, which is observed when the "growth accounts" for the first quarter of the twentieth century are compared with those for the second half of the nineteenth century. Two visions of the dynamics of productivity growth are germane to an understanding of these developments. One emphasizes the role of forces affecting broad sections of the economy, through spillovers of knowledge and the diffusion of general purpose technologies (GPT's). The second view considers that possible sources of productivity increase are multiple and idiosyncratic. Setting aside possible measurement errors, the latter approach regards sectoral and economy-wide surges of the TFP growth to be simply the result of which carried more weight than others. Although there is room for both views in an analysis of the sources of the industrial TFP acceleration during the 1920's, we find the evidence more compelling in support of the first approach. The proximate source of the TFP surge lay in the switch from declining or stable capital productivity to a rising output-capital ratio, which occurred at this time in many branches of manufacturing, and which was not accompanied by slowed growth in labor productivity. The 1920's saw critical advances in the electrification industry, the diffusion of a GTP that brought significant fixed capital-savings. But the same era also witnessed profound transformations in the American industrial labor market, followed the stoppage of mass immigration from Europe; rising real wages provided strong impetus to changes in workforce recruitment and management practices that were underway in some branches of the economy before the War. The productivity surge reflected the confluence of these two forces. This historical study has direct relevance for policies intended to increase the rate of productivity growth. In many respects, the decade of the 1920's launched the US economy on a high-growth path that lasted until the 1970's. If we hope to return to the growth performance of that era, we would be well advised to understand how it began.

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SIEPR Discussion paper No. 98-1
Taxation and Saving
B. Douglas Bernheim
March 1999

In this survey, I summarize and evaluate the extant literature concerning taxation and personal saving. I describe the theoretical models that economists have used to depict savings decisions and I explore the positive and normative implications of these models. The central positive question is whether and to what extent specific public policies raise or lower the rate of saving. The central normative question is whether and to what extent it is desirable to tax the economic returns to saving. I also examine empirical evidence on the saving effects of various tax policies. This evidence includes econometric studies of the generic relation between saving and the after-rate tax of return, as well as the analyses of responses to the economic incentives that are imbedded in tax-deferred retirement accounts. Finally, I also discuss several indirect channels through which tax policy may affect household saving by altering the behavior of third parties, such as employers.

SIEPR Discussion paper No. 98-2
An Insider's View of FCC Spectrum Auctions
Evan R. Kwerel and Gregory L. Rosston
February 1999

After a long period of awarding spectrum licenses inefficiently, changes in the budget and budgetary process coupled with increases in the value of the spectrum for non-broadcast use led Congress to allow the Federal Communications Commission to award licenses through competitive bidding. Contrary to the perceived view of government bureaucracies as excessively cautious, the FCC used the newfound authority to adopt a novel approach to auction design-simultaneous multiple round auctions. The innovative auction design would not have been adopted without the successful collaboration between government economists and academic economists, who helped to formulate and refine the design so that decision makers at the FCC could be convinced that the novel technique was both superior and practical. The FCC's implementation of competitive bidding was not only rapid as mandated by Congress, but also much less costly than outside alternatives and allowed the integration of spectrum policy decisions and auction design. Experience from several auctions has led to a number of open questions and refinements. The FCC is trying to replicate the success with the original auction design by facilitating dialog between the agency and outside auction experts in order to address these issues. The lessons from the auctions process should guide policy makers as they propose and implement future programs. Development of a constituency is necessary even for the efficiency enhancing programs. Once a program is in place, collaboration between government and leading academics can push these programs to further increase the public interest and withstand criticism normally leveled at government agencies. In addition, continued flexibility and willingness to re-examine a program is possible depending on the intrenched interests.

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SIEPR Discussion paper No. 98-5
Information Technology, Workplace Organization and the Demand for Skilled Labor: Firm-level Evidence
Timothy F. Brsnahan, Erik Brynjolfsson and Lorin M. Hitt
February 1999

Recently, the relative demand for skilled labor has increased dramatically. We investigate one of the causes, skilled-biased technical change. Advances in information technology (IT) are among the most powerful forces bearing on the economy. Employers who use IT often make complementary innovations in their organizations and in the services they offer. Our hypothesis is that these co-inventions by IT users change the mix of skills that employers demand. Specifically, we test the hypothesis that is a cluster of complementary changes involving IT, workplace organization and services that is the key skill-biased technical change. We examine new firm-level data liking several indicators of IT use, workplace organization, and the demand for skilled labor. In both a short-run factor demand framework and a production function framework, we find evidence for complementarity. IT use is complementary to a new workplace organization which includes broader job responsibilities for line workers, more decentralized decision-making and more self-managing teams. In turn, both IT and that new organization are complements with worker skill, measured in a variety of ways. Further, the managers in our survey believe that IT increases skill requirements and autonomy among workers in their firms. Taken together, the results highlight the roles of both IT and Itenabled organizational change as important components of the skill-biased technical change.

SIEPR Discussion paper No.99-2
Adjusting to a New Technology: Experience and Training
Elhanan Helpman and Antonio Rangel
January 1998 Revised: December 1998

How does the economy react to the arrival of a new major technology? The existing literature on General Purpose Technologies (GPTs) has studied the role that mechanisms like secondary innovations, diffusion, and learning by firms play in the adjustment process. By contrast, we focus on a new mechanism based on the interplay between technological change and human capital accumulation. We show that technological change that requires more education and training, like computerization, necessarily produces an initial slowdown. Surprisingly, however, technological change that lowers the training requirement, like the mover from the artisan shop to the factory, can produce either a bust or a boom. We identify three key properties that determine which effect will occur: 1) the productivity of inexperienced workers; 2) the speed with which experience increases productivity; and 3) the level of general skills required to operate the new technology.

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SIEPR Discussion paper No. 99-6
The Appropriate Design of Collective Bargaining Systems: Learning from the Experience of Britain, Australia, and New Zealand
John Pencavel
November 1998

The experiences of three countries -- Britain, Australia, and New Zealand -- are drawn upon to suggest how the legal framework for collective bargaining ought to be designed to bring forth unionism's most desirable features. For most of the twentieth century, these three countries have adopted quite different regulatory postures: Australia and New Zealand (until recently) intervened extensively into the procedures for wage determination and set up compulsory arbitration tribunals to underpin wages; by contrast, Britain's support of collective bargaining was indirect. In all cases, however, this regulation of collective bargaining complemented other economic policies that contributed to inferior economic performance, something that has now been recognized in New Zealand and Britain by reforms that have taken place during the past two decades. The lessons for economic policy are that superior macro-economic performance is easier to attain when collective bargaining is regulated not by an assortment of mandates and constraints set down in legal code, but by allowing managements and workers to design bargaining protocols that suit them and by promoting competition in product and factor markets. In specifying the framework of collective bargaining, the state should not be partisan and should encourage the resolution of disputes at the level of the firm or place of work.

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SIEPR Discussion paper No. 499
Wages, Skills and Technology in the United States and Canada
Kevin M. Murphy, W. Craig Riddell and Paul Romer
August 1998

Wages for more and less educated workers have followed strikingly different paths in the US and Canada. During the 1980s and 1990s, the ratio of the earnings of university graduates to high school graduates increased sharply in the US but fell slightly in Canada. Katz and Murphy (1992) found that for the US, a simple supply-demand model fit the pattern of variation in the premium over time. We find that the same model and parameter estimates explain the variation between the US and Canada. In both instances, the relative demand for more educated labor shifts out at the same, consistent rate. Both over time and between countries, the variation in rate of growth of relative wages can be explained by variation in the relative supply of more educated workers. Many economists suspect that technological change is causing the steady increases in the relative demand for more educated labor. If so, these data provide independent evidence on the spatial and temporal variation in the pattern of technological change. Whatever is causing this increased demand for skill, the evidence from Canada suggested that increases in educational attainment and skills can reduce the rate at which relative wages diverge.

SIEPR Discussion paper No. 495
Competition Policy in European Sports after the Bosman Case
Roger G. Noll
June 1998

In the Bosman decision, the European Court of Justice declared that the rules of international football (soccer) governing the player market violated the Maastricht Treaty by preventing international competition for professional athletes. The purpose of this paper is to extend the logic of the Bosman decision to other governance rules of European football, including policies regarding broadcasting, product licensing, and creating and expanding professional leagues. The essence of the argument is that growth in demand for sports and the conversion of European television from nationalized monopoly to privatized competition has vastly increased the financial incentive to create international football leagues comprised of the best teams from the existing national premier leagues. Thus far, national and international football organizations have resisted this movement, but they are unlikely to be successful in doing so. Hence, the relevant question is to identify the various ways these international leagues can be structured, and to apply the principles of competition policy analysis to evaluate them. The main conclusions are that the European Union should, if possible, promote multiple competing leagues rather than a single, monopoly league, or if this is not feasible, to prevent the single league from monopolizing the sale of broadcasting and licensing rights and the number or premier league teams that will be permitted.

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SIEPR Discussion paper No. 494
Reducing the Communication Gap Between Economists and Policy Makers: A Set of Structural Policy Indicators
Jan-Erik Stostad
April 1998

Economists have come to view indicators like the budget deficit and the inflation rate as necessary tools when discussing stabilization policy. In dealing with structural policy, however, indicators have a clearly less prominent role. The paper argues that constructing a standardized set of structural indicators for the Norwegian economy, based on economic theory, is likely to strengthen structural policy surveillance and improve the quality of public debate on efficiency and growth issues. A simple "Market Failure Approach" is presented to help identify interesting indicators.

SIEPR Discussion paper No. 498
A Historical Analysis of Monetary Policy Rules
John B. Taylor
March 1998

This paper examines several episodes in U.S. monetary history using the framework of an interest rate rule for monetary policy. The main finding is that a monetary policy rule in which the interest rate responds to inflation and real output more aggressively than it did in the 1960s and 1970s, or than during the time of the international gold standard, and more like the late 1980s and 1990s, is a good policy rule. Moreover, if one defines "policy mistakes" as deviations from such a good policy rule, then such mistakes have been associated with either high and prolonged inflation or drawn out periods of low capacity utilization.

SIEPR Discussion paper No. 493
The Location and Allocation of Assets in Pension and Conventional Savings Accounts
John B. Shoven
March 1998

This paper examines the problem of optimal asset location policy for pension and non-pension retirement saving. If someone wants to save more than they are permitted to put into a tax-deferred pension account, then the question is which asset class (stocks or bonds) should be held in the pension and which should be held outside in conventional accounts. The standard answer - give any corporate bonds in the portfolio a preferred position in the pension - is shown, in general, to be incorrect. For most households and for most equity mutual funds, the optimal location strategy is to give first priority to holding the stock fund inside the pension. Bonds would have a lower locational priority and might have to be held outside the pension in the form of municipals. The paper also examines the optimal total retirement portfolio asset allocation between stocks and bonds for risk averse retirement savers. A policy of 60 percent stocks and 40 percent bonds is shown to be attractive for even extremely risk averse investors.

SIEPR Discussion paper No. 497
Do Stock Market Liberalizations Cause Investment Booms?
Peter Blair Henry
November 1997

Stock market liberalization has a strong positive effect on investment. I document this result for a cross section of emerging markets and show that the relationship holds even when controlling for economic reforms and changes in other fundamental values. There are three principal components to this finding. First, in each of the two years immediately following liberalization, the growth rate of private investment is 10 and 13 percentage points greater than the sample mean respectively. Second, increases in stock market valuation that are caused by liberalization predict larger subsequent increases in the growth rate of investment than generic valuation increases. Finally, in addition to the investment surge it causes by driving up stock prices, liberalization also increases investment through a channel that operates independently of the liberalization-induced increase in valuation. After controlling for stock returns, investment is still 12 percent points higher than the sample mean in the second year after liberalization. The analysis is a natural experiment of the kind proposed by Fisher and Merton (1984) and suggests that stock market liberalization provides a valuable impetus to the economic reform process.

SIEPR Discussion paper No. 492
Communications Policy in the Era of Choice and Convergence with Reflections on the Markle Foundation
Roger G. Noll and Monroe E. Price
October 1997

In the 1960s, technological progress caused the technologies of communications media to begin to converge. Convergence enhanced the prospects for competition in the media, promising consumers more choices - but only if histroically anticompetive policies could be reversed. As the era of convergence with choice was dawning, Lloyd Morrisett became the President of the John and Mary Markle Foundation, and immediately changed the focus of the Foundation's program from medical reserach to communications policy. This essay traces both the history of technology and policy in communications, and the closely related activities of the foundation, during the Morrisett presidency, from September 1969 to December 1997. As such, the essay provides both an intellectual history of policy research in communications and a chronicle of how a relatively small but well-managed foundation can have a major impact in an important area of public policy.

SIEPR Discussion paper No. 491
What Accounts for the Variation in Retirement Wealth among U.S. Households?
B. Douglas Bernheim, Jonathan Skinner, Steven Weinberg
September 1997

Household survey data consistently depict large variations in saving and wealth, even among households with similar socio-economic characteristics. Within the context of the life cycle hypothesis, families with identical lifetime resources might choose to accumulate different levels of wealth for a variety of reasons, including variation in time preference rates, risk tolerance, exposure to uncertainty, relative tastes for work and leisure at advanced ages, income replacement rates, and so forth. These factors can be divided into a small number of classes, each with a distinctive implication concerning the relation between accumulated wealth and the shape of the consumption profile. By examining this relation empirically, one can test for the presence or absence of these particular explanations for differences in wealth. Using the Panel Study of Income Dynamics and the Consumer Expenditure Survey, we find very little support for life cycle models that rely on the above factors to explain wealth variation. The data are, however, consistent with "rule of thumb" or "mental accounting" theories of wealth accumulation.

SIEPR Discussion paper No. 496
Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices
Peter Blair Henry
September 1997

The decade from 1984 to 1994 witnessed unprecedented emerging stock market liberalizations, as governments from Caracas to Kuala Lumpur opened their equity markets to non-residents for the first time. Emerging market stock prices also boomed during this period. It is tempting to conclude that the stock market openings were responsible for the jump in asset prices, but the wave of openings was concurrent with a period of drastic economic reform. What then, caused the boom? Was it external opening, reform, or both? By constructing an exhaustive list of all major stock market liberalizations and economic reforms occurring in twelve LDCs from 1984 to 1994, I am able to disentangle the effects of stock market opening from the influence of economic reform. The results are striking. The effects of stock market liberalization are at most two thirds as large as suggested by previous work, and economic reforms are an equally important source of asset revaluation.

SIEPR Discussion paper No. 490
Education and Saving: The Long-Term Effects of High School Financial Curriculum Mandates
B. Douglas Bernheim, Daniel M. Garrett, Dean M. Maki
June 1997

Over the last forty years, the majority of states have adopted consumer education policies, and a sizable minority have specifically mandated that high school students receive instruction on topics related to household financial decision-making (budgeting, credit management, saving and investment, and so forth). In this paper, we attempt to determine whether the curricula arising from these mandates have had any discernable effect on adult decisions regarding saving. Using a unique household survey, we exploit the variation in requirements both across states and over time to identify the effects of interest. The evidence indicates that mandates have significantly raised both exposure to financial curricula and subsequent asset accumulation once exposed students reached adulthood. These effects appear to have been gradual rather than immediate--a probable reflection of implementation lags.

SIEPR Discussion paper No. 487
The Syndrome of the Ever-Higher Yen, 1971-95: American Mercantile Pressure on Japanese Monetary Policy
Ronald McKinnon, Kenichi Ohno, Kazuko Shirono
May 1997

From August 1971 through to April 1995, the yen ratcheted up against the dollar because of mercantile pressure from the United States, which was anxious to dampen its eroding market shares in manufacturing and burgeoning trade deficits. While temporarily ameliorating political tensions arising out of innumerable Japan-U.S. trade disputes, these great yen appreciations imposed relative deflation on Japan without correcting the trade imbalance between the two countries.

Although resisting sharp yen appreciations in the short run, the Bank of Japan validated this syndrome of ever-higher yen by following a dependent monetary policy that was deflationary relative to that independently established by the U.S. Federal Reserve System. The appreciating yen was a forcing variable in determining the Japanese price level. After 1985, this resulted in great macroeconomic instability in Japan including endaka fukyo (high-yen-induced recessions) in 1986-87 and more severely in 1992-95. These recessions further curtailed Japan's imports, thus widening her trade surplus, and so further aggravated American mercantilists.

This unfortunate cycle was (temporarily?) suspended in the summer of 1995 only after authorities in the U.S. Treasury finally recognized that the Japanese macro-financial system was on the verge of collapse. In addition to suspending trade hostilities, the American and Japanese governments collaborated to drive the yen back down by almost 50 percent form its April peak. This permitted the modest recovery of the Japanese economy in 1996-97. But whether the syndrome of the ever-higher yen is over, or is simply in remission, remains to be seen.

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SIEPR Discussion paper No. 488
Relational Financing as an Institution and its Viability under Competition
Masahiko Aoki, Serdar Dinc
May 1997

This paper presents a new, generic definition of relational financing that may cover a wide range of financial practices in different economies, ranging from the Japanese main bank relationship, to bank lending to smaller firms, and venture capital in the U.S. It then discusses various incentives of the financier to commit to relational financing and reviews the recent literature on issues about how those incentives are affected by increasing competition. One useful insight is that increasing competition is not necessarily harmful to relational financing. It then applies theoretical insights to problems of institutional transition in two Asian economies. It argues that the Japanese financial system will retain some aspects of relational financing even after the impending financial deregulation, although there will be a significant reduction in the bank's role in corporate governance. Finally, it assesses that the ongoing experiment of main bank relationship in China may be one of viable financial options for successful transition of the planned economy to a market economy, but cautions that more competition in the banking sector is necessary for relational banking to emerge as an institution.

SIEPR Discussion paper No. 489
The Rise of the Middle Class and China's Future Food Deficit
Scott D. Rozelle, Pan A. Yotopoulos, Jikun Huang
 April 1997

 On of the most closely watched debates by researchers on China's food economy addresses the question: Will China be able to produce most of what it needs to feed itself in the 21st century? The preponderance of evidence from research favors the viewpoint that China will essentially be able to feed itself even though future imports of grains will most likely rise. This conclusion, to the extent that it is based on historical data, may not reflect the new pressures on the food economy that emanate from structural changes in China as a result of rapidly rising wealth, urbanization, marketization, and technological change. Notable among the neglected structural factors that change the contours of the demand for food is the graduation of consumers from poverty to the middle class (Yotopoulos, 1985). This has a twofold impact on demand. First, the income elasticity for livestock products is higher than for food grains (which means as income rise, more grain is demanded). Second, the switch in classes, from one with a food grain-based diet (and low consumption of grains) to another with a higher level of consumption of grain-intensive livestock products, also creates a large jump in total demand for grains. The size of the additional demand depends on the number of people who graduate to improved diets and on the difference between the old standard at which they were consuming and the new. While the income elasticity of demand is accounted for in projections, the graduation effect of the switch in classes is often overlooked.

The purpose of this paper is to revisit the debate on the impact of China's development at home and in the world by systematically exploring the implications of China's rapid growth of income, the structure of that income growth (or the pattern of inequality), and the competition of consumers for food and feed. Using a set of structural parameters estimated by the authors from primary and secondary data, a supply and demand modeling framework projects the future balance of China's major grain commodities, while explicitly examining the impact of the new food-feed paradigm. An upward revision of projected demand increases the potential for short-term grain deficits that could lead to abrupt price rises. The concatenation of these events will almost certainly not starve the world; but it is likely to create serious food security problems for those inside and outside China who rely on food markets and who are not in a position to pay high prices for food in the short run.

SIEPR Discussion paper No. 486
The Incentive for Non-Price Discrimination by an Input Monopolist
Nicholas Economides
April 1997

This paper considers the incentive for non-price discrimination of a monopolist in an input market who also sells in an oligopoly downstream market through a subsidiary. Such a monopolist can raise the costs of the rivals to its subsidiary through discriminatory quality degradation. We find that the monopolist always, even when it is cost-disadvantaged, has the incentive not to raise costs to the whole downstream industry including its subsidiary. Moreover, increasing rivals' costs nullifies the effects of traditional imputation floors, and prompts the creation of imputation floors that account for the artificial costs imposed on downstream rivals. The results of this paper raise concerns about the potentially anti-competitive effects of entry of local exchange carriers in long distance service.

SIEPR Discussion paper, No.485
From Market Magic to Calypso Science Policy
Paul A. David
February 1997

The current reconsideration of public research funding policies in the U.S., and U.K. and other industrialized economies makes it important that policy makers and the public understand the valid economic grounds for government support of science. This review article of a book recently published in Britain and the U.S., which argues for the ending of all government support of non-military R&D, provides an occasion to take stock of what is known about the subject. This review article concludes that laissez-faire science policy arguments advanced by Terrance Kealey's book are analytically without foundation, and are based upon distortions and misinterpretations of the evidence of economic history, as well as on the misuse of economic methods.

SIEPR Discussion paper No. 480
The Incentive for Non-Price Discrimination by an Input Monopolist
Nicholas Economides
January 1997

This paper considers the incentive for non-price discrimination of a monopolist in an input marker who also sells in an oligopoly downstream market through a subsidiary. Such a monopolist can raise the costs of the rivals to its subsidiary through discriminatory quality degradation. We find that the monopolist always has the incentive to raise the costs of the rivals to its subsidiary in a discriminatory fashion, but does not have the incentive to raise costs to the whole downstream industry including its subsidiary. Moreover, increasing rivals' costs nullifies the effects of traditional imputation floors, and prompts the creation of imputation floors that account for the artificial costs imposed on downstream rivals. The results of this paper raise concerns about the potentially anti-competitive effects of entry of local exchange carriers in long distance service.

SIEPR Discussion paper No. 482
Special Economic Zones as Catalysts for Transition
John M. Litwack, Yingyi Qian
November 1996

One of the early strategic decisions in Chinese reform was the establishment of several special economic zones. These areas received both relatively high levels of investment and favorable tax treatment. We interpret this strategy as an appropriate response to two critical problems facing the reformers at this time: (1) A limited ability to commit due to the lack of institutions to constrain the state from expropriation, and (2) a political constraint to meet significant basic requirements in social policy. The interaction between these two problems can cause the economy to be caught in a low-equilibrium trap if limited resources are spread too thinly. By concentrating resources in special economic zones, this trap might be avoided in at least some areas of the economy, which could also eventually generate important spillover effects elsewhere. Thus, in the presence of important commitment and political problems, special economic zones can serve as catalysts for transition, despite the resulting (inefficient) diversion of resources and growth in regional inequality.

SIEPR Discussion paper No. 484
Regulatory Pricing Rules To Neutralize Network Dominance
Nicholas Economides, Giuseppe Lopomo, Glenn Woroch
November 1996

This paper evaluates the effectiveness of several pricing rules intended to promote entry into a network industry dominated by an incumbent carrier. Drawing on the work of Cournot and Hotelling, we develop a model of competition between two interconnected networks. In a symmetric equilibrium, the price of cross-network calls exceeds the price of internal calls. This "calling circle discount" tends to "tip" the industry to a monopoly equilibrium as would a network externality. By equalizing charges for terminating calls, reciprocity eliminates differences between internal and cross-network prices and makes monopoly less likely. Imputation counteracts an incentive by the dominant network to "price squeeze" a rival by eliminating differences in the wholesale price of termination and the implicit price for internal use. By increasing profits of rival networks and increasing their subscribers' surplus, imputation supports additional entry. Finally, an unbundling rule reduces termination fees charged by a network that was engaging in pure bundling. Again, entry will be facilitated as rival networks offer potential subscribers a more attractive rate schedule.

SIEPR Discussion paper No. 481
Federalism and the Soft Budget Constraint
Yingyi Qian, Gérard Roland
September 1996

We study the relationship between the organization of government involving fiscal decentralization (i.e. federalism) and the degree of the soft budget constraint. The incentives of the government to bail out inefficient projects are determined by the trade-off between political benefits and (endogenous) economic costs. Two effects of federalism are derived: First, fiscal competition among local governments in the presence of mobile factors increases the opportunity costs of bailout at the margin and thus can be viewed as a commitment device (the "competition effect"). Second, monetary centralization together with fiscal decentralization may not only harden budget constraints but also reduce inflation (the "checks and balance effect"). Our theory is used to interpret China's transition to markets.

SIEPR Discussion paper No. 483
Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing
Nicholas Economides, Giuseppe Lopomo, Glenn Woroch
September 1996

We discuss the effects of strategic commitments and of network size in the process of setting interconnection fees across competing networks. We also discuss the importance of the principles of reciprocity and imputation of interconnection charges on market equilibria. Reciprocity means that both networks charge the same for interconnection. Imputation means that a network charges its customers as much as it charges customers of the other network for the same service. Assuming that each consumer cannot subscribe to more than one network, we begin by analyzing a game of strategic symmetry where the two networks choose all prices simultaneously. Second, we allow a dominant network to set the interconnection fee before the opponent network can set its prices. This results in a price-squeeze on the rival network. Third, we show that the imposition of the reciprocity rule eliminates the strategic power of the first mover. Under reciprocity, one network sets the common interconnection fee at cost, and the equilibrium prices for final services are lower than in the two previous games without reciprocity. Moreover, prices under reciprocity obey the principle of imputation. In the long run, consumers subscribe to one of the two networks. Typically, there is a multiplicity of equilibria, including corner equilibria, where all consumers subscribe to the same network. However, under reciprocity, there are no corner equilibria.