IS BILL GATES THE EXCEPTION OR THE NORM – ROLE OF HUMAN CAPITAL IN OCCUPATION CHOICE IN IT INDUSTRIES

While innovation is the hallmark of the information technology (IT) industry, very little research has studied individuals motivation toinnovate either as scientists in research and development (R&D) departments of established firms, or as entrepreneurs startingtheir own ventures. In this research, we develop a game theoretic model based on theories of human capital and information asymmetry to explore how individuals’ skill levels impact their decision on whether to work for established companies or become entrepreneurs. Our results suggest that if information about individuals’ skills is private information, then highly skilled individuals choose to become entrepreneurs. In the presence of imperfect signaling, employees with very high skills or very low skills tend to work in established companies, and those with intermediate skills become entrepreneurs. We also find that entrepreneurs, on average, have higher skill levels than scientists, and increased technology risks raises the mass of scientists in the market

Endogenous growth and adverse selection in entrepreneurship

This paper proposes a model of Schumpeterian endogenous growth incorporating the role of market imperfections that exist due to adverse selection between investors that finance R&D and entrepreneurs that perform R&D. There is a distribution of agents indexed by a skill factor that determines one's average productivity at performing research. An entrepreneur starts-up a research venture by borrowing from an investor that funds R&D so as to invent new goods. Skill is private information, creating an adverse selection problem for the investor who designs a truth-telling mechanism. We show that an increase in the mean skill enhances growth as it leads to greater R&D productivity and investment; while an increase in the dispersion of the skill distribution dampens growth as it makes the adverse selection problem between investors and entrepreneurs more severe. The growth rate would double in the absence of adverse selection. The R&D investment of the average size firm must be subsidized threefold for the negative adverse selection effect to be nullified. We provide U.S. industry-level and European sector-level evidence in favor of the positive scale effect and negative adverse selection effect using the firm size distribution (FSD) to proxy for the entrepreneurial skill distribution.Asymmetric information Mechanism design Innovation Technological change

The Optimality of a Control Band Policy

Consider a firm with an arbitrary profit function whose relative price follows a Brownian motion with negative drift. When the firm faces a fixed cost of price adjustment, we prove the optimal pricing policy is a control band if the following sufficient conditions are met: the profit function is continuous, strictly concave and single-peaked; moreover, together with its first and second derivatives, it is bounded in absolute value by a polynomial. We also demonstrate various ways of constructing the value function associated with the control band policy and show it has certain properties carried over from the profit function. Numerical examples are found to be consistent with empirical estimates regarding the frequency of price adjustments. (Copyright: Elsevier)stochastic control, menu cost

On the counter-cyclicality of prices and markups in a Cournot model of entry

We prove in a Cournot model that the price and markup are counter-cyclical due to changes in the extent of competition if the income effect is decreasing in the price, as occurs when preferences are homothetic or demand is isoelastic.

Real Options in Information Systems – a Revised Framework

While real options are increasingly used in evaluating returns on IT projects, scholars and practitioners have started questioning the use of financial option pricing models such as Black- Scholes and Binomial models to evaluate these. We analyze this question by employing decision tree analysis to model a typical scenario involving real options – that of building a prototype before commencing an IT project. We use numerical simulation to compare the option value generated by our model with that approximated by the financial option pricing models. The main result of our paper is that the financial option pricing models consistently overestimate the value of a real option compared to the true value over a range of parameter values. This suggests that managers must exercise caution while evaluating options involving specific situations such as IT projects, and applying the generic financial option pricing models may not reflect the true value of the option

Demand Uncertainty and Cost Behavior

We investigate analytically and empirically the relationship between demand uncertainty and cost behavior. We argue that with more uncertain demand, unusually high realizations of demand become more likely. Accordingly, firms will choose a higher capacity of fixed inputs when uncertainty increases in order to reduce congestion costs. Higher capacity levels imply a more rigid short-run cost structure with higher fixed and lower variable costs. We formalize this “counterintuitive” argument in a simple analytical model of capacity choice. Following this logic, we hypothesize that firms facing higher demand uncertainty have a more rigid short-run cost structure with higher fixed and lower variable costs. We test this hypothesis for the manufacturing sector using data from Compustat and the NBER-CES Industry Database. Evidence strongly supports our hypothesis for multiple cost categories in both datasets. The results are robust to alternative specifications