Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking

In a repeat trade model with buyer's specific investment, a simple renegotiable contract implements an efficient outcome if premature termination of trade is governed by an appropriate contract breakup rule. In equilibrium, such a rule allows for termination with positive probability and gives the buyer a bargaining leverage over the seller when the contract is renegotiated ex-post. These returns ("breakup rents") from buyer's rent-seeking complement his ex-post bargaining power and restore his ex-ante investment incentives when he would otherwise underinvest due to a standard (ex-ante) hold-up problem. Buyer's opportunism thus creates social value and restores efficiency in case of frictionless renegotiation. When the contract is rigid and not renegotiable until after the first round of trade, however, a first-best breakup rule does not exist. A second-best rule trades off buyer's investment and seller's activity distortions that arise from excessive effort to curb the buyer's bargaining leverage. Conditions on existence of a first or second-best breakup rule as well as implications for the legal discussion on compliance standards for breach of contract are given.Repeat transaction trade, contract breakup, specific investment, hold-up, rent-seeking, installment contracts, compliance standards, breach of contract

Intrinsic Competition and the Labor-Schooling Trade-off in Uganda Competition in Child Labor and Schooling Decision Making in Uganda. Evidence from a Bivariate Probit Model

I argue that a households interdependent decisions over their childrens labor and school activities are not only a function of observable hard facts but also of its intrinsic values and beliefs. Applying econometric methods, after all observable factors have been controlled for, the degree to which these joint decisions over these two activities are correlated can be seen as the intrinsic competition households and children face. This coefficient of the labor-school trade-off is not associated with any observable variables and should therefore be object of future research in the field. In the empirical study, quite recent and hardly discussed data from Uganda is used for the joint estimation of child labor and school attendance applying a bivariate probit model. The results shed light on the degree of the unobserved or intrinsic competition between labor and school attendance. Results implying a stronger trade-off between these two decisions in urban than rural areas and stronger for girls than for boys are obtained. Especially rural boys have a considerably higher tendency to combine their labor activities with schooling while the obtained trade-off implies for girls to specialize. Results seem to be driven by unobserved cost-related factors, no clear explanation on this, however, is found.child labor, school attendance, decision trade-off, simultaneous time allocation decision, bivariate probit, Uganda

Patent Disclosure in Standard Setting

We present a model of industry standard setting with two-sided asymmetric information about the existence of intellectual property. We provide an equilibrium analysis of (a) rms' incentives to communicate ideas for improvements of an industry standard, and (b) rms' decisions to disclose the existence of intellctual property to other participants of the standardization process

We must protect competition. Policy Brief #2020/03 May 2020.

Germany's economic output slumped by 2.2 per-cent in the first quarter of this year, amounting to the sharpest drop since the financial crisis of 2008/2009. For the year as a whole, the federal government even expects the largest decline in gross domestic product since the post-war pe-riod. In its efforts to counteract the stark economic im-pact of the Corona pandemic, the federal govern-ment is putting in place aid programmes worth billions. Various packages are designed to se-cure the liquidity of companies with a functioning business model before the crisis. But the corpo-rate landscape will inevitably change. Many sec-tors such as tourism and the hospitality industry are massively affected by the lockdown and re-lated measures. Industries that are strongly inte-grated into international supply chains, such as the metal, electrical, and automotive industries, are also struggling with disruptions and losses. Despite the aid packages, there is a considera-ble risk of market upheaval. And on top, the packages themselves can come with negative ef-fects for competition, experts warn. Especially in heavily crisis-ridden sectors, there is a threat of reduced competition. Some companies will dis-appear from the market - ailing companies are good takeover candidates. All in all, an increase in market concentration is feared. And these developments have consequences for the competitiveness of the economy as a whole, as we show in our current study "Price Markups, Innovation, and Productivity: Evidence from Ger-many." We examine how competition between companies in Germany has developed in recent years and show that effective competition is an important driver of productivity and innovation. We summarize the key findings of the study in this policy brief

Visibility of technology and cumulative innovation: evidence from trade secrets laws

We use exogenous variation in the strength of trade secrets protection to show that a relative weakening of patents (compared to trade secrets) has a disproportionately negative effect on the disclosure of processes – inventions that are not otherwise visible to society. We develop a structural model of initial and follow-on innovation to determine the effects of such a shift in disclosure on overall welfare in industries characterized by cumulative innovation. We find that while stronger trade secrets encourage investment in R&D, they may have negative e�ects on overall welfare – the result of a significant decline in follow-on innovation