Quality Competition, Market Structure and Endogenous Growth

This paper studies the role of quality competition in endogenous growth and institutional factors which can affect growth through affecting quality competition. The R&D-based growth literature as it stands attributes the incentives for innovations to monopolist market structure, and regards the driving force of growth being 'the rent-pull'. This paper presents a 'competition-push' theory of growth by considering an environment where firms can coexist and compete in quality within the same markets. Quality competition takes the form of vertical product differentiation or cost-reducing process innovation, which requires endogenous fixed R&D costs. Due to the nonrival and excludable features of 'quality' and consequent nonconvexity, market concentration naturally occurs in a manner such that R&D intensity and market structure are determined simultaneously in equilibrium. The main conclusions are that quality competition suffices to provide incentives for innovation at industry level, and through knowledge spillovers it also drives aggregate technical progress, that institutional restriction on free entry into quality competition may be desirable to some degree, but monopolization is usually not optimal, that credit constraint which limits quality competition is detrimental to growth.Endogenous growth, quality competition, vertical differentiation, endogenous sunk costs, competition-push, rent-pull, institutional barriers to entry, credit constraint

Submarkets, Shakeouts and Industry Life-Cycle

Some recent empirical findings suggest that there are intrinsic links between the statistical regularities regarding cohort survival patterns, the persistence of firm turnover, and shakeout during an industry life-cycle. This paper presents a theoretical model which explains these regularities and the links between them. I begin the analysis by treating the market as comprising a number of strategically independent submarkets, so that I can separate the strategic interaction effect at the submarket level and the independence effects which operate across these independent submarkets at the aggregate level. The analysis reveals that within each submarket a 'selection process' in in quality competition induces market concentration over time, and this leads to a certain shakeout pattern at the disaggregate level. The study also finds that the dynamics of the emergence of submarkets in a conventionally defined industry plays a crucial role in shaping the aggregate pattern of the industry life-cycle.Industry life-cycle, industrial growth, submarkets, shake-outs

Credit rationing and firms in oligopoly

This paper develops a theory of the firm, and equilibrium credit rationing mechanisms in oligopoly with R&D-product market competition. Credit rationing arises from a hold-up problem between wealth-constrained entrepreneurs and external investors. Underinvestment occurs if entrepreneurial wealth constraint is binding, even though the equilibrium corporate governance structure addresses the hold-up problem optimally. In a symmetric equilibrium outcome all firms face equitable credit-size rationing. In contrast the asymmetric equilibrium outcome sees some firms (the 'preys') denied external credits entirely while the others (the 'predators') receiving more favorable finances, which turns out to increase market concentration and overall R&D investments.

The long wave of conditional convergence

We calculate the time series of the speed of convergence for 21 high-income countries over the period: 1953-1996, using low-pass filtered time series of per-capita GDP which are thus isolated from the influence of the short-run business cycle components. The observed patterns contradict the conventional ‘time-invariant speed of convergence’ hypothesis. Furthermore, dynamic panel data analysis provides strong evidence of the existence of stationary long cycles in the per capita GDP time series. We develop and estimate a technology-diffusion-based endogenous growth model, which shows that the endogenous growth of the domestic knowledge stock can account for the long cycles observed in the data. <br><br> Keywords; trend reversion, speed of convergence, growth cycles

Financial institutions and the wealth of nations: tales of development

Interactions between economic development and financial development are studied by looking at the roles of financial institutions in selecting R&amp;D projects (including for both imitation and innovation). Financial development is regarded as the evolution of the financing regimes. The effectiveness of R&amp;D selection mechanisms depends on the institutions and the development stages of an economy. At higher development stages a financing regime with ex post selection capacity is more effective for innovation. However, this regime requires more decentralized decision-making, which in turn depend on contract enforcement. A financing regime with more centralized decision-making is less affected by contract enforcement but has no ex post selection capacity. Depending on the legal institutions, economies in equilibrium choose regimes that lead to different steady-state development levels. The financing regime of an economy also affects development dynamics through a ‘convergence effect’ and a ‘growth inertia effect’. A backward economy with a financing regime with centralized decision-making may catch up rapidly when the convergence effect and the growth inertia effect are in the same direction. However, this regime leads to large development cycles at later development stages. Empirical implications are discussed

Financial Sector Returns and Creditor Moral Hazard: Evidence from Indonesia, Korea, and Thailand

This paper introduces a framework of investor behavior in which investors form their expectations regarding the credibility of a prospective IMF program in reforming the financial sector characterized by domestic implicit guarantees. We examine the changes in financial sector returns in response to IMF-related news such as announcements of program negotiations and approval to infer investor perception regarding the Fund support associated with the program. We test the implications of our framework based on the East Asian crisis of the late 1990s. Using daily financial sector returns from Indonesia, Korea, and Thailand, we find that news of program negotiations and approval increases financial sector returns in Indonesia and Korea. The findings are consistent with investor perception that negotiated IMF programs are non-credible due to expected continuation of domestic implicit guarantees during the future FundMoral Hazard, the IMF, Asian crisis, Financial markets

Financial Institutions and The Wealth of Nations: Tales of Development

Interactions between economic development and financial development are studied by looking at the roles of financial institutions in selecting R&D projects (including for both imitation and innovation). Financial development is regarded as the evolution of the financing regimes. The effectiveness of R&D selection mechanisms depends on the institutions and the development stages of an economy. At higher development stages a financing regime with ex post selection capacity is more effective for innovation. However, this regime requires more decentralized decision-making, which in turn depend on contract enforcement. A financing regime with more centralized decision-making is less affected by contract enforcement but has no ex post selection capacity. Depending on the legal institutions, economies in equilibrium choose regimes that lead to different steady-state development levels. The financing regime of an economy also affects development dynamics through a 'convergence effect' and a 'growth intertia effect'. A backward economy with a financing regime with centralized decision-making may catch up rapidly when the convergence effect and the growth inertia effect are in the same direction. However, this regime leads to large development cycles at later development stages. Empirical implications are discussed.Development, transition, financial institutions, R&D.

Financial Institutions and The Wealth of Nations: Tales of Development

Interactions between economic development and financial development are studied by looking at the roles of financial institutions in selecting R&D projects (including for both imitation and innovation). Financial development is regarded as the evolution of the financing regimes. The e?ectiveness of R&D selection mechanisms depends on the institutions and the development stages of an economy. At higher development stages a financing regime with ex post selection capacity is more e?ective for innovation. However, this regime requires more decentralized decision-making, which in turn depend on contract enforcement. A financing regime with more centralized decision-making is less a?ected by contract enforcement but has no ex post selection capacity. Depending on the legal institutions, economies in equilibrium chose regimes that lead to di?erent steady-state development levels. The financing regime of an economy also a?ects development dynamics through a ‘convergence e?ect’ and a ‘growth inertia e?ect.’ A backward economy with a financing regime with centralized decision-making may catch up rapidly when the convergence e?ect and the growth inertia e?ect are in the same direction. However, this regime leads to large development cycles at later development stages. Empirical implications are discussed.development, transition, financial institutions, R&D