Restriced Cost Functions and the Rate of Return to Quasi-Fixed Factors, with an Application to R&D and Capital in the Bell System

This paper provides a statistical test to assess the adequacy of static equilibrium models. The test is based on a restricted cost function framework together with the envelope conditions which characterize static equilibrium for the quasi-fixed factors. We also show how restricted cost function models can be exploited to investigate some important issues such as the calculation of the rates of return to quasi-fixed factors, the determination of over- or underinvestment in particular assets, and the distinction between short run excess capacity and long run economies of scale. We provide an empirical application of these techniques to data on the Bell System for the period 1947-1976, treating the stocks of physical capital and of research and development (R&D) as quasi-fixed inputs. The results suggest that there was substantial overinvestment in capital and underinvestment in R&D compared to the static equilibrium levels, and that the rates of return to capital and R&D were about 4.5 and 10-15 percent, respectively.

Investment in R&D, Costs of Adjustment and Expectations

This paper proposes a framework which integrates convex costs of adjustment and expectations formation in the determination of investment decisions in R&D at the firm level. The model is based on cost minimization subject to the firm's expectations of the stream of output and the price of R&D, and results in equations for actual and multiple-span planned investment in R&D and for the realization error as functions of these expectations. The model accommodates alternative mechanisms of expectations formation and provides a methodology for testing these hypotheses empirically. We derive estimable equations and testable parameter restrictions for the rational, adaptive and static expectations hypotheses. The empirical results using pooled firm data strongly reject the rational and static expectations hypotheses and generally support adaptive expectations.

Variable Cost Functions and the Rate of Return to Quasi-Fixed Factors: An Application to R and D in the Bell System

We formulate a variable cost function model in which certain inputs are treated as quasi-fixed, and develop a simple statistical test of whether optimization occurs for the quasi-fixed inputs. It is shown how to retrieve characteristics of the long-run cost function from the variable cost parameters, with specific reference to the cost elasticity and the elasticities of substitution. We also present a model of the I returns to R & D in the context of a regulated firm and show how to I estimate the net rate of return to R & D from the variable cost function. A translog version of the model is estimated for the Bell System for the period 1947-1976. The empirical results suggest substantial long-run economies of scale at the aggregate level. The formal envelope test indicates that the Bell System's use of capital and R & D was cost- minimizing during the post-war period, but the conclusion is seriously qualified by evidence that the power of the test in this application is low. Finally, we estimate the net rate of return to R & D in the Bell System in the range of 25-40 percent, which is somewhat higher than available estimates for manufacturing industries.

The L&E of Intellectual Property – Do we get maximum innovation with the current regime?

Innovation is crucial to economic growth – the essential path for lifting much of the world population out of dire poverty and for maintaining the living standard of those who already have. To stimulate innovation, the legal system has to support the means through which innovators seek to get rewarded for their efforts. Amongst these means, some, such as the first mover advantage or 'lead time,' are not directly legal; but secrets and intellectual property rights are legal institutions supported for the specific purpose of stimulating innovation. Whilst the protection of secrets has not changed very much over recent years, intellectual property (or IP) has. IP borrows some features from ordinary property rights, but is also distinct, in that, unlike physical goods, information, the object of IP, is not inherently scarce; indeed as information and communication technologies expand, the creation and distribution of information is becoming ever cheaper and in many circumstances abundant, so that selection is of the essence ('on the internet, point of view is everything'). Where rights on information extend too far, their monopolising effect may hamper innovation. The paper investigates the underlying structure of IP rights and surveys what we know empirically about the incentive effects of IP as about industries that flourish without formal IP

Catching-up and falling behind knowledge spillover from American to German machine tool makers

In our days, German machine tool makers accuse their Chinese competitors of violating patent rights and illegally imitating German technology. A century ago, however, German machine tool makers used exactly the same methods to imitate American technology. To understand the dynamics of this catching-up process we use patent statistics to analyze firms? activities between 1877 and 1932. We show that German machine tool makers successfully deployed imitating and counterfeiting activities in the late 19th century and the 1920s to catchup to their American competitors. The German administration supported this strategy by stipulating a patent law that discriminated against foreign patent holders and probably also by delaying the granting of patents to foreign applicants. Parallel to the growing international competitiveness of German firms, however, the willingness to guarantee intellectual property rights of foreigners was also increasing because German firms had now to fear retaliatory measures in their own export markets when violating foreign property rights within Germany