Glenn Ellison

Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach

This paper discusses the prevalence of Silicon Valley‐style localizations of individual manufacturing industries in the United States. A model in which localized industry‐specific spillovers, natural advantages, and pure random chance all contribute to geographic concentration is used to develop a test for whether observed levels of concentration are greater than would be expected to arise randomly and to motivate new indices of geographic concentration and of coagglomeration. The proposed indices control for differences in the size distribution of plants and for differences in the size of the geographic areas for which data are available. As a consequence, comparisons of the degree of geographic concentration across industries can be made with more confidence. Our empirical results provide a strong reaffirmation of the previous wisdom in that we find almost all industries to be somewhat localized. In many industries, however, the degree of localization is slight. We explore the nature of agglomerative forces in describing patterns of concentration, the geographic scope of localization, and the coagglomeration of related industries and of industries with strong upstream‐downstream ties.

Risk Taking by Mutual Funds as a Response to Incentives

This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk‐adjusted fund returns. A fund company, however, in its desire to maximize its value as a concern, has an incentive to take actions that increase the inflow of investments. We use a semiparametric model to estimate the shape of the flow‐performance relationship for a sample of growth and growth and income funds observed over the 1982–92 period. The shape of the flow‐performance relationship creates incentives for fund managers to increase or decrease the riskiness of the fund that are dependent on the funds year‐to‐date return. We examine portfolio holdings of mutual funds in September and December and show that mutual funds do alter the riskiness of their portfolios at the end of the year in a manner consistent with these incentives.

Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance

We examine whether mutual fund performance is related to characteristics of fund managers that may indicate ability, knowledge, or effort. In particular, we study the relationship between performance and the managers age, the average composite SAT score at the managers undergraduate institution, and whether the manager has an MBA. Although the raw data suggest striking return differences between managers with different characteristics, most of these can be explained by behavioral differences between managers and by selection biases. After adjusting for these, some performance differences remain. In particular, managers who attended higher-SAT undergraduate institutions have systematically higher risk-adjusted excess returns. Copyright The American Finance Association 1999.

What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns

Many industries are geographically concentrated. Many mechanisms that could account for such agglomeration have been proposed. We note that these theories make different predictions about which pairs of industries should be coagglomerated. We discuss the measurement of coagglomeration and use data from the Census Bureaus Longitudinal Research Database from 1972 to 1997 to compute pairwise coagglomeration measurements for U.S. manufacturing industries. Industry attributes are used to construct measures of the relevance of each of Marshalls three theories of industry agglomeration to each industry pair: (1) agglomeration saves transport costs by proximity to input suppliers or final consumers, (2) agglomeration allows for labor market pooling, and (3) agglomeration facilitates intellectual spillovers. We assess the importance of the theories via regressions of coagglomeration indices on these measures. Data on characteristics of corresponding industries in the United Kingdom are used as instruments. We find evidence to support each mechanism. Our results suggest that input-output dependencies are the most important factor, followed by labor pooling.

Rules of Thumb for Social Learning

This paper studies agents who consider the experiences of their neighbors in deciding which of two technologies to use. We analyze two learning environments, one in which the same technology is optimal for all players and another in which each technology is better for some of them. In both environments, players use exogenously specified rules of thumb that ignore historical data but may incorporate a tendency to use the more popular technology. In some cases these naive rules can lead to fairly efficient decisions in the long run, but adjustment can be slow when a superior technology is first introduced.

Theories of Cartel Stability and the Joint Executive Committee

This article reexamines the experience of the Joint Executive Committee, an 1880s railroad cartel, to assess the applicability of the Green and Porter (1984) and Rotemberg and Saloner (1986) theories of price wars. After discussing necessary modifications to the theories, I estimate a number of dynamic models to explore the causes of price wars, the cyclical nature of pricing, and the possibility that secret price cuts may have been given. The estimates provide some support for the predictions of the first theory.

Knife Edge or Plateau: When Do Market Models Tip?

This paper studies whether agents must agglomerate at a single location in a class of models of two-sided interaction. In these models there is an increasing returns effect that favors agglomeration, but also a crowding or market-impact effect that makes agents prefer to be in a market with fewer agents of their own type. We show that such models do not tip in the way the term is commonly used. Instead, they have a broad plateau of equilibria with two active markets, and tipping occurs only when one market is below a critical size threshold. Our assumptions are fairly weak, and are satisfied in Krugmans [1991b] model of labor market pooling, a heterogeneous-agent version of Paganos [1989] asset market model, and Ellison, Fudenberg and Moebiuss [2002] model of competing auctions.

A Simple Framework for Nonparametric Specification Testing

This paper presents a simple framework for testing the specification of parametric conditional means. The test statistics are based on quadratic forms in the residuals of the null model. Under general assumptions the test statistics are asymptotically normal under the null. With an appropriate choice of the weight matrix, the tests are shown to be consistent and to have good local power. Specific implementations involving matrices of bin and kernel weights are discussed. Finite sample properties are explored in simulations and an application to some parametric models of gasoline demand is presented.

Dynamics of Open Source Movements

This paper considers a dynamic model of the evolution of open source software projects, focusing on the evolution of quality, contributing programmers, and users who contribute customer support to other users. Programmers who have used open source software are motivated by reciprocal altruism to publish their own improvements. The evolution of the open-source project depends on the form of the altruistic benefits: in a base case the project grows to a steady-state size from any initial condition; whereas adding a need for customer support makes zero-quality a locally absorbing state. We also analyze competition by commercial firms with OSS projects. Optimal pricing policies again vary: in some cases the commercial firm will set low prices when the open-source project is small; in other cases it mostly waits until the open-source project has matured.

Search and Obfuscation in a Technologically Changing Retail Environment: Some Thoughts on Implications and Policy

Technologies, especially the Internet, have transformed how consumers search for products and prices. Price search has become cheap and easy and, therefore, ubiquitous, for many products. Just as technologies have made price search easier, however, they have increased incentives that firms have to obfuscate, or make price search harder. In this article, we focus on these actions that firms take and their effects on market participants. We discuss empirical evidence on this phenomenon, as well as its welfare impacts in the context of theories of search and obfuscation. Finally, we offer a framework for thinking about policy interventions based on this welfare analysis and outline some of the challenges facing policymakers.