Gianpaolo Rossini

Product homogeneity as a prisoner's dilemma in a duopoly with R&D

Abstract We prove that firms may decide to compete in undifferentiated products due to a prisoners dilemma generated by externalities affecting R&D in product innovation. Moreover, the incentive to invest is higher under price competition than under quantity competition.

Capital Commitment and Cournot Competition with Labour-Managed and Profit-Maximising Firms

The behaviour of labour managed and profit seeking firms in a Cournot duopoly with capital strategic interaction is analysed. When a pure labour managed duopoly is considered, firms choose their capital commitments according to the level of the interest rate, unlike what usually happens when only profit maximising firms operate in the market. If we consider a mixed duopoly, the profit maximising firm under‐invests while the labour managed firm over‐invests regardless of the rental cost of capital

The Gains From Cooperative R&D With A Concave Technology And Spillovers

We reassess the respective gains from R&D cooperation and competition in a Cournot duopoly where firms adopt a concave cost-reducing R&D technology. Cooperation, in the form of either a cartel or a joint venture, is always profitable for firms and, contrary to the previous literature on the same topic, (i) no corner solutions emerge and (ii) R&D cooperation is socially superior to independent ventures for any spillover level, provided the cost of R&D financing is sufficiently high.

Start-up Entry Strategies: Employer vs. Nonemployer firms

From 1997 to 2001 we observe in the Usa a faster growth in the number of Nonemployer firms (NF) vis a vis Employer firms (EF). The diverse speed of net entry may be due to particular internal organisation of the two types of firms and the effect that this has on the reactions to market uncertainty. However, the set of internal organizations of firms is larger than that made up simply by EFs and NFs, in particular among newborn firms, since we observe corporate start-ups with employees, firms owned and managed by their founders who are simultaneously the employees and, finally, non corporate enterprises. The second class of firms mostly belongs to the category of NFs, according to US nomenclature, while non corporate firms may belong to either category. Our curiosity is attracted by different entry patterns of NFs and EFs and our aim is to interpret them. According to recent literature, firms carry out an irreversible investment, such as entry, only if market prices are strictly larger than average total costs (Marshallian point). However, the trigger price that makes firms become active is affected by institutional rules, the existence of profit sharing, efficiency wages, exit options - i.e. partial reversibility -, financial constraints. Then, the internal organization of a newborn firm may make the difference. In a continuous time stochastic environment, where firms bear a sunk cost, we model entry as a growth option. On the trace of distinct objective functions we show that NFs and EFs have specific entry patterns in terms of output price and/or size. Why? Simply because they react in diverse fashions to market price volatility. In this sense we are able to show that, in most cases, the NF is locally less risky. This makes the NF better suited to enter under conditions of higher volatility. This exactly corresponds to what happened during the years between 1997-2001.

A simple test of the role of foreign direct investment in the Feldstein- Horioka puzzle

The purpose of this article is to test the dependency of domestic investment on domestic saving in the Feldstein-Horioka spirit. Its innovation is to use a definition of investment that does not include foreign direct investment. It does so since FDI should not be considered in the intertemporal budget constraint of a recipient country and therefore should not be related to domestic saving in a meaningful way. Once it adopts, as the dependent variable, pure domestic investment the result is a weakened relationship between internal saving and investment.

Current account composition and sustainability of external debt

If an economy runs a current account (CA) deficit and finances it via a corresponding net inflow of equity capital the external debt (ED) does not change, i.e. the CA deficit does not add to ED. This is no paradox. It simply comes from the definition of CA deficit and ED, and points to different degrees of sustainability of CA deficits according to the way they are financed and to the composition of the CA itself. By the evaluation of the determinants of interest rates spreads vis à vis US lending rates we assess the sustainability of CA deficits. We find that FDI net inflows (proxy of equity capital) allow emerging economies to sustain larger CA imbalances with respect to CA deficits financed by inflows of more liquid assets. Equity capital is a way to finance the CA. It does not contribute to the ED and it affects the solvency assessment of a country.

IS VERTICAL DISINTEGRATION PREFERABLE TO INTEGRATION WHEN THERE IS PROCESS R&D?

Vertical integration (VI) may show social superiority over vertical disintegration (VD) if there is an opportunity of internalizing most of the externalities affecting vertical arms length relationships. When enterprises carry out process innovating R&D (PIRD), VI turns out to be quite often privately and socially superior to VD. However, there are circumstances where VI does not provide the same incentive to carry out PIRD. VD pushes further PIRD displaying instances of private superiority and even some spells of social desirability. If PIRD costs are asymmetric along the vertical chain of production, fresh advantages of VD may appear. In this sense, the paper may supply an additional interpretation of the recent wave of domestic and cross-border VD.

Profit sharing regulation and repeated bargaining with a shut-down option

We analyze the behavior of a firm where workers share profits with shareholders by using a model cast in an Aoki framework. There are two sorts of uncertainties: one relates to the market price, assumed to follow a random path in continuous time, while the other concerns internal organization, i.e. the share of profits to be distributed between workers and shareholders. In the institutional setting we adopt the firm is flexible, since it has the possibility of shutting down, by paying laid off workers a bonus, which represents a sunk cost. The distributive share is determined in the firms internal labor market through a bargaining that takes place at two occasions: at the beginning of the firms life and when profits reach a threshold level. The second bargaining is endogenized according to a procedure imposed upon shareholders and workers by a regulator who may use profit distribution as a way to intervene in the firms internal labor market. Specificities make this market highly imperfect. Different share parameter patterns result, owing to a shut down option, according to whether (a) the regulator calls for renegotiation when profits are increasing or decreasing, (b) the regulators rule is announced in advance or is discretionally set.

Pitfalls in Private and Social Incentives of Vertical Cross-border Integration and Disintegration

Production increasingly takes place on a cross-border basis along two patterns. Either a vertically integrated (VI) multinational firm (MNF) spreads the production sequence over many countries or vertically disintegrated (VD) firms operate independently in distinct stages and countries. On the private side, the decrease of transport costs expands VD, due to incentives alternatively in the upstream (U) and the downstream (D) sections of production. With VD the benefits are disseminated over many countries. With VI they are skewed towards a single area. Then, some countries prefer cross-border VD. In an international duopoly setting, with vertical restraints due to competition or trade policies, VD becomes the privately preferred mode and provides further ground for the wave of international fragmentation.

Vertical Integration and Operational Flexibility

The main aim of the paper is to highlight the relation between flexibility and vertical integration. To this purpose, we go through the selection of the optimal degree of vertical disintegration of a flexible firm which operates in a dynamic uncertain environment. The enterprise we model enjoys flexibility since it can switch from a certain amount of disintegration to vertical integration and viceversa. This means that the firm never loses vertical control, i.e., the ability to produce all inputs even when it buys them in the market. This sort of flexibility makes for results which are somehow contrary to the Industrial Organization recent literature and closer to the Operations Research results. In this sense we provide a bridge between the two approaches and rescue Industrial Organization from counterintuitive conclusions.