Government Spending Composition in a Simple Model of Schumpeterian Growth

This paper investigates the relevance of government purchasing behavior for innovation-based economic growth. We construct a parsimonious Schumpeterian growth model in which demand from the public sphere can effectively alter the economy's rate of technological change. We incorporate results of various empirical studies arguing that public sector demand acts as incentive for private innovation activities. In contrast to the standard Schumpeterian growth framework, we account for industry heterogeneity in terms of innovation potential. This extension allows to bring government demand policy within the realm of the growth policy debate. By varying the composition of its purchases, the government can induce a reallocation of private resources to stimulate the rate of technological change. This comes along with temporarily faster economic growth. Moreover, our welfare analysis implies that it is always worth implementing a policy in which industries benefit from public purchases subject to their specific innovation size.public demand, endogenous technological change, Schumpeterian growth

The Impact of Government Procurement Composition on Private R&D Activities

This paper addresses the question of whether government procurement can work as a de facto innovation policy tool. We develop an endogenous growth model with quality-improving innovation that incorporates industries with heterogeneous innovation sizes. Government demand in high-tech industries increases the market size in these industries and, with it, the incentives for private firms to invest in R&D. At the economy-wide level, the additional R&D induced in high-tech industries outweighs the R&D foregone in all remaining industries. The implications of the model are empirically tested using a unique data set that includes federal procurement in U.S. states. We find evidence that a shift in the composition of government purchases toward high-tech industries indeed stimulates privately funded company R&D.public demand, technological change, endogenous growth

Costs of Control in Groups

This paper explores the role of social groups in explaining the reaction to control.We propose a simple model with a principal using control devices and a controlledagent, which incorporates the existence of social groups. Testing experimentally theconjectures derived from the model and related literature, we find that agents in socialgroups (i) perform more than other (no-group) agents; (ii) expect less control thanno-group agents; (iii) decrease their performance substantially when actual controlexceeds their expectation, while no-group agents do not react; (iv) do not reciprocatewhen facing less control than expected, while no-group agents do.

Technology, outsourcing, and the demand for heterogeneous labor: Exploring the industry dimension

It has become common within the literature of skill-biased technological change to look at technologies, as well as their impact on the demand for labor as homogeneous across industries. This paper challenges this view. Using a linked employer-employee panel of Germany differentiated by industries for the period 2001-2005, we investigate substitution effects between labor of different skills (tasks) on the one hand, and technology as well as outsourcing on the other. Our findings are at odds with the idea of economy-wide homogeneity of substitution patterns. We find that in some industries IT capital substitutes for labor, while it complements it in others. However, substitution patterns are symmetric across labor types. Outsourcing often correlates negatively with the demand for labor performing explicit and problem-solving tasks. It is mainly uncorrelated or positively correlated with the demand for labor performing interactive tasks. The outsourcing-related results support the offshoring theory proposed by Blinder (2006).demand for skills, technology, outsourcing

On Social Identity, Subjective Expectations, and the Costs of Control

Controlling employees can have severe consequences in situations that are not fully contractible. However, the perception of control may be contingent on the nature of the relationship between principal and agent. We, therefore, propose a principal-agent model of control that takes into account social identity (in the sense of Akerlof and Kranton, 2000, 2005). From the model and previous literature, we conclude that a shared social identity between the principal and agent has both a cognitive, that is, belief-related, and a behavioral, that is, performance-related, dimension. We test these theoretical conjectures in a labor market experiment with perfect monitoring. Our ndings confirm that social identity has important implications for the agent's decision-making. First, agents who are socially close to the principal (in-group) perform, on average, more on behalf of the principal than socially distant (no-group) agents. Second, social identity shapes the agent's subjective expectations of the acceptable level of control. In-group agents expect to experience less control than no-group agents. Third, an agent's reaction to the monitoring level she eventually faces also depends on social identity. If the experienced level of control is lower than the expected control level, that is, the agent faces a positive sensation, the increase in performance is less pronounced for in-group agents than for no-group agents. In the case of a negative sensation, however, in-group agents react stronger than no-group agents. Put differently, being socially distant from the principal amplies the performance-enhancing effect of a positive control surprise and mitigates the detrimental performance effect of a negative surprise.Control, Identity, Employee motivation, Principal-agent theory, Lab experiment

Technology, outsourcing, and the demand for heterogeneous labor: Exploring the industry dimension

It has become common within the literature of skill-biased technological change to look at technologies, as well as their impact on the demand for labor as homogeneous across industries. This paper challenges this view. Using a linked employer-employee panel of Germany differentiated by industries for the period 2001-2005, we investigate substitution effects between labor of different skills (tasks) on the one hand, and technology as well as outsourcing on the other. Our findings are at odds with the idea of economy-wide homogeneity of substitution patterns. We find that in some industries IT capital substitutes for labor, while it complements it in others. However, substitution patterns are symmetric across labor types. Outsourcing often correlates negatively with the demand for labor performing explicit and problem-solving tasks. It is mainly uncorrelated or positively correlated with the demand for labor performing interactive tasks. The outsourcing-related results support the offshoring theory proposed by Blinder (2006)

Hidden Costs of Control in Social Groups

This paper investigates the role of social identity in reactions to control. We propose a simple principal-agent model with control that incorporates the existence of social groups. Our laboratory experiment shows that, in contrast to no-group agents, agents in social groups (i) perform better; (ii) expect less control; (iii) do not reciprocate when facing less control than expected; (iv) decrease their performance substantially when actual control exceeds their expectation. Hidden costs of control thus appear to be more substantial in social groups

Costs of Control in Groups

This paper explores the role of social groups in explaining the reaction to control.We propose a simple model with a principal using control devices and a controlledagent, which incorporates the existence of social groups. Testing experimentally theconjectures derived from the model and related literature, we find that agents in socialgroups (i) perform more than other (no-group) agents; (ii) expect less control thanno-group agents; (iii) decrease their performance substantially when actual controlexceeds their expectation, while no-group agents do not react; (iv) do not reciprocatewhen facing less control than expected, while no-group agents do

Team building and hidden costs of control

This paper investigates the interaction of intrinsic and extrinsic incentives. We propose a simple principal-agent model with control that incorporates the existence of social groups resulting from common experiences in the past. Our laboratory experiment shows that agents with previous common experiences with their principals (CE agents) perform better than agents without such experiences (NCE agents). However, as soon as actual control exceeds their expectation, CE agents decrease their performance substantially, which has no equivalent for NCE agents. This pronounced decrease in effort when control is perceived as excessive represents a novel channel through which hidden costs of control materialize. Our results have important implications for firms' strategies to motivate employees

Technological Intensity of Government Demand and Innovation

Governments purchase everything from airplanes to zucchini. This paper investigates whether the technological intensity of government demand affects corporate R&Dactivities. In a quality-ladder model of endogenous growth, we show that an increase in the share of government purchases in high-tech industries increases the rewards for innovation, and stimulates private-sector R&D at the aggregate level. We test this prediction using administrative data on federal procurement performed in US states. Both panel fixed effects and instrumental variable estimations provide results in line with the model. Our findings bring public procurement within the realm of the innovation policy debate