Complementary Assets, Start-Ups and Incentives to Innovate

In this paper we examine in a game theoretic framework in how far market conditions facilitating start-up formation positively affect technical change and firms' profits. We consider a model in which R&D efforts of an incumbent firm generate technological know-how embodied in key R&D employees, who might use this know-how to form a start-up. Market conditions, in particular the availability of complementary assets, influence whether new firms are created and determine expected profits for start-up-founders. Easy availability of complementary assets has the direct effect that the generation of start-ups, which leads to the diffusion and duplication of know-how, is fostered. However, incentives of incumbent firms to invest in R&D might be reduced because of the increased danger of knowledge loss through spin-out formation. We fully characterize the effects of an increase in the availability of complementary assets, demonstrating that under certain market conditions the effects on innovative activities and industry profits can be negative.Complementary Assets, Technical Change, R&D Effort, Startup

Cheap Talk, Gullibility, and Welfare in an Environmental Taxation Game

We consider a simple dynamic model of environmental taxation that exhibits time inconsistency. There are two categories of firms, Believers, who take the tax announcements made by the Regulator to face value, and Non-Believers, who perfectly anticipate the Regulator's decisions, albeit at a cost. The proportion of Believers and Non- Believers changes over time depending on the relative profits of both groups. We show that the Regulator can use misleading tax announcements to steer the economy to an equilibrium that is Pareto superior to the solutions usually suggested in the literature. Depending upon the initial proportion of Believers, the Regulator may prefer a fast or a low speed of reaction of the firms to differences in Believers/Non-Believers profits.Environmental policy, Emissions taxes, Time inconsistency, Heterogeneous agents, Bounded rationality, Learning, Multiple equilibria, Stackelberg games

When do Thick Venture Capital Markets Foster Innovation? An Evolutionary Analysis

In this paper we examine the trade off between different effects of the availability of venture capital on the speed of technological progress in an industry. We consider an evolutionary industry simulation model based on Nelson and Winter (1982) where R&D efforts of an incumbent firm generate technological know-how embodied in key R&D employees, who might use this know-how to found a spinoff of the incumbent. Venture capital is needed to finance a spinoff, and therefore the expected profits from founding a spinoff depend on how easily venture capital can be acquired. Accordingly, thick venture capital markets might have two opposing effects. First, incentives of firms to invest in R&D might be reduced and, second, if spinoff formation results in technological spillovers between the parent firm and the spinoffs, the generation of spinoff firms might positively influence the future efficiency of the incumbent's innovation efforts. We study how this tradeoff influences the effect of venture capital on the innovation expenditures, speed of technological change and the evolution of industry concentration in several scenarios with different industry characteristics.Venture Capital, Technological Progress, R&D Effort, Spinoff, Industry Evolution

Complementary Assets, Start-Ups and Incentives to Innovate

Colombo L, Dawid H. Complementary Assets, Start-Ups and Incentives to Innovate. International Journal of Industrial Organization. 2016;44:177-190.We examine to what extent market conditions facilitating start-up formation affect firms' R&D investment and profits. We consider a model in which R&D efforts of an incumbent firm generate partly tacit technological know-how embodied in a key R&D employee, who might use it to form a start-up. The availability of complementary assets influences whether new firms are created and determine expected profits for start-up's founders. A large availability of complementary assets has the direct effect that the generation of start-ups is fostered. However, as a strategic effect, the incentives of incumbents to invest in R&D may be reduced because of the increased danger of knowledge loss occurring through start-up formation. We fully characterize the effects of an increase in the availability of complementary assets, showing that counter-intuitively there are cases in which it induces an increase in incumbents' R&D investment

Keeping a learned society young

Aging organizations - regardless of whether they are firms, faculties, societies, political bodies, teams, or national academies - seek ways to rejuvenate. This paper demonstrates that the best way to keep an organization young is through a mixed strategy of recruiting both young and old, and that, contrary to intuition, recruiting those of middle age is the least effective strategy for maintaining a younger age structure. The aging of learned societies is a problem in many national academies. Faced with rising life expectancy, particularly for older persons, the average age of academy members is increasing. Another reason for "overaging" is an increase in the age at election. In an organization with a fixed size, the annual intake is strictly determined by the number of deaths and the statutory retirement age. This can, among many learned societies, lead to a fundamental dilemma: the desire to maintain a young age structure, while still guaranteeing a high recruitment rate. We derive an optimal recruitment policy which is bimodal, i.e., it entails shifting recruitment partly to younger ages and partly to older ages, while decreasing the recruitment of middle-aged candidates. Although the optimization problem explicitly involves only the average age and the recruitment rate as objectives, the methodology implicitly allows us to take into consideration all other objectives (formal or informal) used in the actual election practice.age-specific recruitment policy, fixed-size population, optimal control

Production and Finance in EURACE

EURACE is a major FP6 STREP project aiming at constructing anexhaustive agent-based model of the European economy, populated by avery large number of sophisticated, autonomous agents. The EURACEmodel, which has an explicit spatial structure, includes all the majormarkets considered in quantitative macroeconomic modelling (consumergoods, investment goods, labour, credit and finance). It offers aunique opportunity for studying, from a new perspective, theempirically observed but theoretically poorly understood link betweenthe real and the financial sphere of a modern economy. After summarilypresenting the main features of EURACE, this paper describes in moredetail the newly developed financial management module thatintermediates between the real and the financial spheres in EURACE. Ina nutshell, this module defines the link between the hiring andinvestment behavior of the firms as a function of the revenues theyobtain by selling their products, of the money they can raise on thecredit and financial markets, of their dividend policy, and othermajor aspects of financial decision-making.Agent-based macroeconomics; Financial policy; Parallel computing

EURACE: A Massively Parallel Agent-Based Model of the European Economy

EURACE is a major European attempt to construct an agent-based model of the European economy with a very large population of autonomous, purposive agents interacting in a complicated economic environment. To create it, major advances are needed, in particular in terms of economic modeling and software engineering.In this paper, we describe the general structure of the economic model developed for EURACE and present the Flexible Large-scale Agent Modeling Environment (FLAME) that will be used to describe the agents and run the model on massively parallel supercomputers. Illustrative simulations with a simplifiedmodel based on EURACE's labour market module are presented.Agent-based Computational Economics; X-Machines; Parallelcomputation.

Learning Benevolent Leadership in a Heterogenous Agents Economy

This paper studies the potential commitment value of cheap talkinflation announcements in an agent-based dynamic extension of theKydland-Prescott model. In every period, the policy maker makesa non-binding inflation announcement before setting the actualinflation rate. It updates its decisions using individual evolutionarylearning. The private agents can choose between two differentforecasting strategies: They can either set their forecast equal tothe announcement or compute it, at a cost, using an adaptive learningscheme. They switch between these two strategies as a function ofinformation about the associated payoffs they obtain throughword-of-mouth, choosing always the currently most favorable one.Weshow that the policy maker is able to sustain a situation with apositive but fluctuating fraction of believers. This equilibrium isPareto superior to the outcome predicted by standard theory. Theinfluence of changes in key parameters and the impact of transmissionof information among nonbelievers on the dynamics are studied.time inconsistency; bounded rationality; forecast and agentheterogeneity; cheap talk; evolutionary learning

Hold-up and the evolution of investment and bargaining norms

The purpose of this paper is to explore the evolution of bargaining norms in a simple team production problem with two sided relationship specific investments, and competition. The puzzle we wish to address is why efficient bargaining norms do not evolve even though there exist efficient sequential equilibria. Conditions under which stochastically stable bargaining conventions exist are characterized, and it is shown that the stochastically stable division rule is independent of the long run investment strategy. Hence, efficient sequential equilibria are not in general stochastically stable, a result that may help us understand why institutions, such as firms, may be needed to ensure efficient exchange in the context of relationship specific investments. We also find that increasing competition, while enhancing incentives, may also destabilize existing bargaining norms