Wilko Letterie

Sequentiality Versus Simultaneity: Interrelated Factor Demand

Firms may adjust capital and labor sequentially or simultaneously. In this paper, we develop a structural model of interrelated factor demand subject to nonconvex adjustment costs and estimated by simulated method of moments. Based on Norwegian manufacturing industry plant-level data, parameter estimates reveal cost advantages for adjusting capital and making net changes in labor simultaneously. Factor demand models with fully specified interrelated adjustment costs structures perform best to describe the dynamic panel data.

Economic Policy, Model Uncertainty and Elections

We analyse a game theoretical model in which policy makers have superior knowledge about the working of the economy relative to voters. We show that parties increase their chances of reelection by basing their policies on the model that best fits in with their preferences. Moreover, we show that if parties care much about holding office, they may deliberately base their policies on a model that is electorally attractive, even if this model does not describe the working of the economy correctly. Our paper provides an explanation for the observation that different political parties subscribe to different economic philosophies. Copyright Blackwell Publishers Ltd 1998.

The information value of R&D alliances: The preference for local or distant ties:

Using a Bayesian learning model, the authors provide a formal understanding of the strategic implications of a firm’s R&D alliance activity through its local or distant ties. A major advantage of the model is that it facilitates an explicit analysis of the factors that determine a firm’s potential to learn from its R&D alliances. The article’s theoretical approach shows how technological uncertainty, information redundancy and heterogeneity of information accuracy jointly affect the formation of inter-firm alliance ties.

On Lumpiness in the Replacement and Expansion of Capital

We estimate a model of homogeneous capital investment with two installation possibilities – replacement and expansion using observations at the establishment level. We find that regime switches identified by ad hoc measures of lumpy investment do not adequately distinguish expansionary from replacement activities. In fact, during periods of expansion, firms spend just as much on replacement capital. Also, using the common 20% rule would not assign a spike to almost 65% of all observations that include expansionary investment in this dataset. Finally, replacement although less responsive to fundamentals than expansions cannot be regarded as an autonomous part of investment.

Global Fixed Capital Investment by Multinational Firms

We develop and test a model of the simultaneous determination of global gross fixed capital investments by multinational firms. We integrate a model of multi-product firms choosing optimal manufacturing locations with a model of dynamic investment optimization. Firms adjust capital stocks in each location in accordance with the expected marginal profitability of capital. Analysis of 1504 fixed capital investment decisions by Japanese multinational firms confirms the prediction that investment is determined not only by total factor productivity, effective demand, and wage levels in the host country, but also by wage levels in other countries in which the firm operates.

Exploring Antecedents of Service Innovation Performance in Manufacturing SMEs

Various factors enable manufacturing firms to attain a competitive advantage based on service innovation – that is, to achieve service innovation performance. Starting from a dynamic capabilities perspective, this article predicts that absorptive capacity is one such critical factor, which in turn may be driven by employee collaboration and the firm’s search breadth. The findings of a survey study of small to medium-sized Dutch manufacturing firms confirm that employee collaboration and search breadth have positive effects on an organization’s potential absorptive capacity, whereas employee collaboration also reinforces its realized absorptive capacity. Thus realized absorptive capacity ultimately enhances service innovation performance. The results have implications for dynamic capabilities theory, and they provide practitioners with potential means to outperform their competitors in service innovation efforts.

Antitrust as Facilitating Factor for Collusion

Abstract This paper examines collusion among firms whose discount factors are private information. Mutual uncertainty regarding intentions to restrict competition might undermine the possibility of tacit collusion. Firms that want to collude may, however, reveal their intentions by consciously acting in breach of antitrust laws. As antitrust activity makes explicit collusion costly in expected terms, it can potentially be (ab)used as signaling device. We show that the fight against cartels may indeed facilitate collusion.

When policy advisors cannot reach a consensus

Abstract. In this paper advisors are selected by two ministers with conflicting interests in order to (1) acquire information, and (2) obtain political legitimacy concerning a project. In the end, parliament decides whether or not the project, of which the consequences are uncertain, is implemented. In principle a minister wants to appoint an advisor whose preferences are similar. However, since the advisor needs to convince the decisive player in the model, the minister may appoint an advisor whose preferences are closer to those of the agents to be persuaded. We also show when polarised advice occurs (the advisors have different preferences) and when consensual advice occurs (they have the same preferences).

Investment and Finance when Liquidation is Costly

In this paper we investigate to what extent expected liquidation costs affect the dependence of a firms investment decision on available finance. We hypothesise that comovement of firm and industry sales measures such costs, which create a premium on external finance and make investment more sensitive to the availability of internal funds. Supportive evidence for this conjecture is obtained from the investment behaviour of a sample of 206 large Dutch manufacturing firms observed during the period 1983-1996. We also demonstrate that our measure of expected liquidation costs has additional explanatory power over other proxies for the premium on external finance – like leverage, retention practice and firm size.

Price Changes - Stickiness and Internal Coordination in Multiproduct Firms

We assess empirically the micro-foundations of producers’ sticky pricing behaviour. The intertemporal profit function considered accounts for various functional forms of menu costs. The focus is on the analysis of multiproduct plants, and the menu costs therefore also allow for economies of scope. The structural model developed is tested on a merged panel of monthly product- and plant-specific producer prices and yearly plant-specific producer statistics for Norwegian plants. We find evidence of linear and fixed menu costs that account for inaction of price adjustment. Convex menu costs are statistically significant but of moderate importance. Finally, our estimates suggest economies of scope in adjusting prices resulting in (incomplete) synchronization of price changes.