Gianluca Femminis

FIRST MOVER ADVANTAGE IN A DYNAMIC DUOPOLY WITH SPILLOVER

We present a dynamic duopoly model of technical innovation in which R&D costs decrease exogenously with time and inter-firm knowledge spillover lowers the second comers R&D cost. The spillover effect only becomes available after a disclosure lag. These features allow us to identify a new type of equilibrium: the leader delays investment until the R&D cost is low enough that the follower finds it optimal to invest as soon as he can benefit from the spillover. This equilibrium is subgame perfect over a wide range of parameters and raises several interesting implications. First, in our new equilibrium, the time delay between the two R&D investments is realistically short. Second, while the presence of a spillover favors the second-mover, this benefit is not enough to rule out a first-mover advantage. Indeed, the first-mover advantage survives whenever technical progress is sufficiently fast and the disclosure lag is relatively long. Third, in case of a major innovation, our equilibrium implies under-investment, which requires a substantial public intervention in favor of the investment activity.

Monopolistic competition, dynamic inefficiency and asset bubbles

We emphasise the importance of the market structure to determine whether dynamic inefficiency is possible in a closed economy. We analyse alternative monopolistic competition frameworks where the existence of some pure profit involves the presence of an asset market. When entry is blockaded, dynamic inefficiency is ruled out because every single firm uses a discount rate higher than the output growth rate to evaluate the stream of future profits. When entry is free but involves a sunk cost constant over time, we need to distinguish between the possibility of asset bubbles and dynamic inefficiency, the condition for the latter being more stringent. If the entry cost increases with productivity, dynamically inefficient equilibria are possible only when population grows.

Currency Attacks with Multiple Equilibria and Imperfect Information: The Role of Wage-setters

We consider a dynamic stochastic model of currency attacks, characterised by imperfect information about the fundamental. Agents, who imperfectly know the state of the economy, not only decide whether to attack the peg, but also formulate expectations concerning the probability of future devaluation. The subjective devaluation probabilities influence the inflation expectations, which, in their turn, affects the second period wage level and hence, unemployment. In this way, first period expectations affect the second period fundamental and hence the policymaker’s ability to resist to an attack. We show that equilibrium expectations may be either ‘optimistic’ or ‘pessimistic’. Optimistic (pessimistic) expectations involve a currency attack equilibrium characterised by a low (high) probability of devaluation. This result is due to the fact that agents decide upon next period wage having observed whether the current period currency attack has been successful or not. This publicly available information is sufficient to allow for a coordination effect among agents.

Dynamic inefficiency with a decreasing returns technology for firms

In this paper, we highlight the possibility of dynamically inefficient equilibria in a model with strictly convex production function at the firm’s level. Decreasing returns imply the existence of some pure profit and hence of an asset market. We endogenise the number of firms by introducing a sunk cost that is to be paid upon entering into the market; since this cost is assumed to be constant, the number of firms increases over time in response out that the growth of the number of firms reduces the rate used to discount future profits, allowing for dynamic inefficiency. We also consider the presence of a constant and exogenous probability of failure affecting firms.

On the Role of Sector Size in Determining the Transition Path

This paper is an attempt to capture the relevance of the relative magnitude of the state and the private sectors in making the transition from central planning more likely to succeed. The basic idea that we introduce is that the growth of the new private sector, in an environment characterized by a severe form of credit constraint, depends on its relative magnitude in the economy. We also propose an extension of the model which examines the issue of full privatization versus restructuring in a credit-constrained environment. In this paper we give brief details of the life of Harold Thayer Davis (1892-1974) and outline his contributions to econometrics in its early years. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester